SIA Engineering - CIMB Research 2017-05-15: Cash-rich, Dividend Play

SIA Engineering - CIMB Research 2017-05-15: Cash-rich, Dividend Play SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Cash-rich, Dividend Play

  • 4Q17 core net profit was in line with our expectations and consensus. FY17 net profit was in line at 106% of our forecast.
  • SIE declared a special DPS of 5 Scts and final DPS of 9 Scts, bringing total DPS for FY17 to 18 Scts. 
  • Low fuel oil and profitability among airlines have extended the lives of Pratt & Whitney engines, boosting associate contribution in SIE profit.
  • Balance sheet remains robust with net cash of S$576m. Share price should be supported by the dividends (ex-div: 27 Jul). Maintain Hold.

Moving more work to line maintenance 

  • 2H17 revenue remained steady yoy but rose 6% hoh to S$568m with stronger line maintenance (+9% hoh to S$267m). 
  • In addition to more flights registered in Changi, more apron work has also been done. SIE has reorganised more hangar work to be performed at line. This is also seen in more light checks in FY17: 427 A-checks, 75 Cchecks and 14 D-checks (FY16: 373, 74, 16). 
  • Fleet management revenue bottomed in 4Q17 with a fleet of 129 aircraft, after the loss of Tiger Airways contract in 2016.

MRO fluctuating with better yield work 

  • Airframe MRO revenue improved 3% hoh and dipped 3% yoy to S$225m. Operating losses (net of staff cost incurred for divesting HAESL) was S$1.3m. This is narrower than 1H17’s S$8.7m. The division has been in operating losses since 1H15 with the exception of 2H16. 
  • The better 2H17 was mainly due to better yield achieved on some aircraft. With more heavy checks from SIA’s A380 expected in 2H18 (de-leasing of five A380s and repair cycle due for others) we believe the division could breakeven in 2018.

Associates surprised by extended P&W engine life 

  • Associates profit was up 27% qoq and 64% yoy to S$22m. 
  • Eagle Services have seen more engine work from Pratt & Whitney’s (P&W) PW4000 for the classic fleet of B747s thanks to lower fuel oil prices and airlines deciding to extend the usage of older aircraft.
  • Pratt & Whitney also appears more aggressive in their marketing efforts. 
  • JV profit however dipped 65% qoq to S$5m on seasonal weakness and constant pressure from oversupply of Rolls Royce spare parts.

Core operation to SIA 

  • Despite SIA getting into a net debt position, we believe full divestment of SIE may not be possible given its core capabilities to support SIA’s expansion in new aircraft. However partial dilution of stake could help to improve the airline’s cashflow and SIE’s liquidity.
  • The total final and special DPS of 14 Scts is in line with our expectations and we believe this will be key to sustaining its near-term share price. With minimum capex ahead (S$40m-50m p.a.), we believe 90% dividend payout is possible.

Maintain Hold but with a higher target price of S$3.98 

  • We raise our FY18-19 EPS forecasts by 2-3% for to reflect higher associates earnings and lower taxes. We also introduce FY2020 forecasts. 
  • Re-rating catalysts could come from major corporate action by its parent or stronger than-expected recovery in MRO.
  • Our target price is lifted on higher earnings and cash balances, still based on DCF valuations (WACC: 6.4%). 
  • Risk to our call could be more aggressive competition from OEMs in after-sale market.

LIM Siew Khee CIMB Research | 2017-05-15
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.98 Up 3.770