SIA Engineering - CIMB Research 2016-11-02: No super dividend despite super cash

SIA Engineering - CIMB Research 2016-11-02: No super dividend despite super cash SIA ENGINEERING CO LTD S59.SI

SIA Engineering - No super dividend despite super cash

  • 2Q17 core net profit was below expectations. 1H17 net profit formed 40% of our FY3/17 forecast and 34% of Bloomberg consensus.
  • We were negatively surprised by the interim dividend cut to 4Scts (1H16: 6Scts), given the completion of divestment gain from HAESL. Net cash stood at S$508m.
  • Pending analysts briefing, we maintain Add and target price based on DCF valuation (S$4.16).

Dividend downer

  • Despite a strong net cash position of S$508m (1Q17: S$616m), 1H17 interim DPS was cut to 4Scts from 6Scts in 1H16. We had forecasted total DPS for FY17 of 15Scts but hoped for 24Scts, given the c.S$178m extraordinary item (EI) derived from the divestment of HAESL.
  • We believe the DPS cut could be due to the company preserving cash for capex on new product and technology upgrades, amid challenging near-term maintenance, repair and overhaul (MRO) outlook.
  • Cash dividend received from JVs and associates was down 38% yoy to S$23.3m in 1H17.

Revenue could be dragged by lower fleet management volume

  • Although Changi Airport data showed +2.5% qoq flights handled, SIE’s revenue dipped 2.5% qoq in 2Q17, possibly due to weaker fleet management volume (possible loss of customers or market share). 

Costs under control

  • 2Q17 EBITDA margin of 14% was in line with our estimate, as staff costs dropped 3% qoq to S$117m. Margin was also helped by S$3.8m forex gain as US$ strengthened against S$ during the quarter.
  • Total operating expenses shrank 5% qoq indicating that airframe repair & maintenance could still have registered a small operating profit (2H16:S$3.3m).
  • Details of segmental breakdown will be disclosed during the briefing.

JV and associates contribution weaker qoq

  • Contribution from JVs weakened 34% qoq and associates was down 8% qoq in 2Q17. Lower engine visits were likely the key drag in 2Q17.
  • Overall contribution from the above accounted for 41% of SIE’s pretax profit in 2Q17.

Maintain Add 

  • Given the structural challenges of stronger airframe and engines, SIE is a dividend play in our view. 
  • We keep our Add call and EPS forecasts for now, pending further details during the briefing. 
  • Key risks include further cut in final DPS and longer-than-expected recovery in MRO.

LIM Siew Khee CIMB Research | 2016-11-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.160 Same 4.160