SIA Engineering (SIE SP) - Maybank Kim Eng 2016-11-02: Surprise DPS cut

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SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - Surprise DPS cut

Maintain HOLD; SGD3.70 TP unchanged 

• 1H17 was in line. However, the interim DPS cut was a negative surprise.
• Our expectations for an unchanged core interim DPS and special payout did not materialise. 
• The 5% decline in earnings from its engine repair and overhaul centres suggests that the workload has yet to pick up. 
• Its outlook statement remains cautious with management citing economic uncertainties and challenging MRO outlook. 
• We cut our interim DPS, but retain a special payout at the full-year results. 
• Maintain HOLD with unchanged TP of SGD3.70, based on 20x FY3/18E EPS (0.25SD above 10- year mean).

1H17 core net profit in line 

• Headline net profit of SGD233.9m includes SGD178m of gains from the restructuring of its Rolls-Royce JVs and an estimated increase in related staff cost of SGD21.3m. Stripping these one-off items out, core net profit of SGD77.2m was broadly in line at 43% of our full-year estimates. 
• Higher flight activities at Changi Airport led to an increase in line maintenance revenue. However, this was offset by a larger decline in fleet management sales, which drove overall revenue down by 1.3%. 
• The 5.2% YoY decline in earnings from its engine repair and overhaul centres suggests that workload has yet to pick up. 
• Management continues to restructure and streamline its operations with its outlook remaining challenging.

Interim DPS cut; No special DPS 

• SIAEC cut its interim DPS to 4 cts (FY16: 6cts), which is surprising given the stabilizing earnings and strong cash balance. 
• Coupled with yet another cautious guidance, we read this DPS cut as a negative signal to its outlook. 
• Our expectation for a 9 cts special DPS payout from the restructuring of its Rolls-Royce JVs did not materialize.

No clear signs of a rebound yet 

• SIAEC is well-positioned to ride on the long-term trend of rising air travel in the region. However, with no clear signs of a rebound in MRO workload, we see limited scope for further re-rating.

Swing Factors

Upside

• Bigger-than-expected workload for Rolls-Royce Trent engines.
• Acceleration in aircraft deployment.
• Increased use of older aircraft on improving economics from lower oil prices.

Downside

• Rising labour costs.
• Fleet renewal by airline customers that could reduce maintenance work.
• Poorly-executed acquisitions.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-02

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.700 Same 3.700