SIA Engineering - UOB Kay Hian 2016-07-27: 1QFY17 Employees Partake Of EI Gains; Core Net Profit Flat

SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - 1QFY17: Employees Partake Of EI Gains; Core Net Profit Flat

SIAEC recognised S$178m in gains from the divestment of HAESL into P&L this quarter. However, SIAEC also recorded an operating loss of S$1.6m due to an incremental provision for staff costs arising from the EI gain. Excluding the provision, operating profit would have fallen 6% yoy to S$19.7m.
In addition, SIAEC continues to guide for a challenging environment.

Meanwhile, at current levels the stock offers a FY18 yield of 3.4%, which is relatively unattractive compared with peers. We prefer STE, which offers a 2016 dividend yield of 4.1%.
Maintain SELL. Target price: S$3.40.

SIAEC recognises S$178.0m in EI gains on disposal of HAESL and a special dividend from the same unit.
SIA Engineering (SIAEC) reported an operating loss as it allocated approximately 12% of the S$178.0m in EI gains to employees. This led to a 19% yoy rise in staff costs, which led to the operating loss. Excluding the incremental staff cost provision, operating profit would have decreased by 5.7% to S$19.7m.
Assuming no incremental tax expense, core net profit would have then risen by 1%, aided by higher interest income and lower taxes for the full year and we had assumed a 4% yoy rise in net profit.

We reckon that the decline in fleet management revenue could be due to a transfer of the business to associate BAPAS, a partnership between SIAEC and Boeing. Under the terms of the partnership, BAPAS would have handled the fleet management of the SIA Group’s B777 aircraft.
SIAEC however indicated that line maintenance and airframe maintenance revenue increased.

Share of profits from JV’s rose 40% yoy. The bulk of the income was likely from earnings of SAESL, SIAEC’s JV with Rolls Royce. The increase could be due to a low base, but we also note that there was a qoq improvement of 16%. The higher contribution could be due to either the end of lease checks or other scheduled maintenance checks.
Associate income, which primarily constitutes SIAEC’s associate interest in ESA (Pratt & Whitney associate) and the BAPAS associate, fell 49% yoy. This could be due to a 86% increase in associate income in the preceding quarter.

However SIAEC indicated that it will continue to invest in new capabilities, initiatives and technologies, while generating higher productivity and improvement.

Key positives are the lower subcontract costs relative to stronger airframe revenue and the lower material costs. This suggests that SIAEC would have benefitted from cost efficiencies during the period.
We believe that line maintenance revenue would have also increased during the period, in line with Changi Airport’s aircraft movements, which rose 4.2% from April-May 16 (Changi Airport Group has yet to release June numbers).

SIA has five A380s which are reaching their end of lease and there is the risk that SIA might not renew the leases. This could result in a decline in airframe revenue as well as contribution from the JV SAESL, which performs maintenance for the Trent 900 engines on A380s.

We lower our FY17 net profit estimate by 6% as we factor in higher staff costs arising from the increased staff cost provisions.

In line with UOBKH, we have lowered our risk-free rate assumptions to 2.5% (previously 3.0%).
We continue to value SIAEC using recurring FCF and derive a target price of S$3.40 following our lower earnings estimates. At S$3.75, SIAEC offers a FY18 yield of 3.4%, which is relatively unattractive compared with peers.
Meanwhile, our target price implies a core FY18 dividend yield of 3.7%. At current levels, we would recommend a switch into STE (STE SP/BUY/$$3.50), which offers a higher dividend yield of 4.1%.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-27

UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.40 SAME 3.40