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

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.


RESULTS


Core net profit flat yoy at S$41.7m; 

  • 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.

Revenue falls by 2.1% due to lower fleet management revenue. 

  • 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. 

JV and associate income fall, partly due to a high base. 

  • 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.


STOCK IMPACT


Continues to guide for challenging environment. 

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

1QFY17’s earnings are not very telling. 

  • 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).

There is also the risk that SIA-related work could decline. 

  • 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.


EARNINGS REVISION/RISK

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


VALUATION/RECOMMENDATION


Maintain SELL with unchanged target price of S$3.40. 

  • 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%.


SHARE PRICE CATALYST

  • No immediate catalyst.




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


Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......