SIA Engineering - DBS Research 2019-02-11: Dividend Expectations Lowered


SIA Engineering - Dividend Expectations Lowered

  • SIA Engineering’s 3QFY19 headline net profit of S$33m below estimates. 
  • JV/associates contribution falters owing to one-off events, but engine shop upswing continues. 
  • Core operating margin improved q-o-q to 6.2% but may be difficult to sustain. 
  • Maintain HOLD with lower Target Price of S$2.70; dividend expectations for FY19 cut to 12Scts per share. 

Maintain HOLD as further upside seems limited.

  • SIA ENGINEERING CO LTD (SGX:S59)’s operating margin improved in 3QFY19 to 6.2% from 4.2% in 1HFY19, but we believe this will be difficult to sustain amid challenging conditions for the heavy maintenance segment. Meanwhile, JV/ associate contributions faltered in 3QFY19, owing to various one-off events, which led to headline profit numbers coming in lower than expected. This is likely to have a bearing on the final dividend number for FY19.
  • Looking ahead though, JV/ associate contributions look set to be robust owing to an upswing in the engine MRO cycle and higher workload from the problematic Trent 1000 engines, and we largely retain our FY20/21 earnings estimates at this stage.
  • Following our downgrade in November 2018, SIA Engineering’s share price retreated sharply to a low of S$2.21 before recovering in early 2019, but we believe there is not enough upside at this stage or further catalysts to warrant an upgrade.

Where We Differ:

  • SIA Engineering’s cash flow generation in 9MFY19 has been weak owing to negative working capital movements. This follows a similar pattern in FY18, and caps dividend expectations.
  • SIA Engineering had cut its interim dividend to 3Scts in 1HFY19 from 4Scts previously, and with headline numbers faltering in 3QFY19, we expect total dividend to be 12Scts in FY19 (down from 13Scts in FY18), as the payout ratio will unlikely be higher than 90%.

Potential Catalyst:

  • Significant M&A activity would be positive for the stock. Privatisation by parent SIA, though unlikely, cannot be entirely ruled out either, after HK-based peer HAECO’s privatisation by Swire Group in 2018.


  • Factoring in the lower dividend assumptions and rolling over our valuation base to FY20, we arrive at a lower Target Price of S$2.70 for SIA Engineering and maintain HOLD.
  • The Target Price is based on a blended valuation framework (PE, EV/EBITDA, dividend yield and DCF).

Key Risks to Our View:

  • Upside risk from better than expected core operating margins.

WHAT’S NEW - Surprise uplift in core EBIT margins in 3QFY19, but difficult to sustain

Headline net profit affected by one-off events at JV/ associate line.

  • SIA Engineering’s 3QFY19 headline net profit was below our expectations at S$33.1m (-40% y-o-y, -13% q-o-q). This brings 9MFY19 net profits to S$111.6m, which forms 69% of our existing full-year net profit forecast.
  • The miss is largely attributable to the impact of a few one-time events totaling S$20.9m from JV/ associate companies. Barring the one-off items, SIA Engineering would have exceeded our estimates and booked a net profit of around S$50.5m (-9% y-o-y, +33% q-o-q).

Stable q-o-q top line performance.

  • Revenue of S$255.9m (- 6% y-o-y, +2% q-o-q) was in line with our forecast as higher line maintenance revenue tempered persistent weakness in the airframe and fleet management segments.

Uptick in EBIT margin sequentially.

  • Core EBIT came in above expectations, on the back of EBIT margin expansion to 6.2% in 3QFY19 (against 4.0% in 1Q19 and 4.5% in 2Q19). While SIA Engineering demonstrated better control over overhead costs in the quarter, we believe it will be challenging to sustain the current margin due to low hangar utilisation amid secular headwinds in the airframe maintenance segment as well as pricing pressures owing to a highly competitive environment, and expect core operating margins to remain around 5% in the foreseeable future.

Contribution from associates and JVs plummeted due to one-time charges, but engine shops’ outlook remains positive.

  • SIA Engineering’s 3QFY19 associate and JV profits of S$19.2m (-53% y-o-y, - 36% q-o-q), was considerably below expectations due to the impact from the following events:
    • A revision in the fee structure of an engine shop, which now evens out revenue recognition instead of a lump sum recognition which occurred in 3QFY18.
    • A change in the functional currency of an associated company, which resulted in a one-time foreign exchange translation loss.
    • A one-time tax charge in certain associates, owing to restructuring activities.
  • Excluding the impact of the above events, profits from associates and JVs would have topped our forecast at S$40.1m (-2% y-o-y, +34% q-o-q).
  • Overall, the engine shops should continue doing well with an upswing in the engine MRO cycle as well as some support from workload on the problematic Trent 1000 engines (which power the Boeing 787 aircraft), which should persist for the next 1-2 years (providing higher work volumes to its JV SAESL with Rolls Royce). Parent company’s SIA’s subsidiary Scoot operates 18 Boeing 787s currently, and SAESL should also be able to benefit from other B787 customers in the Asia-Pacific region.
  • Eagles Service Asia, the JV between SIA Engineering and Pratt & Whitney will likely start servicing PW1100G-JM PurePower Geared Turbofan engines by 4QFY19, and further boost engine shop profits. This will be only the second shop in Asia capable of servicing the Turbofan engines, which are used in narrowbody aircraft including the A320neo family.
  • The long-term prospects are also boosted as SIA Engineering anticipates the GE state-of-the-art engine facility in Singapore to be operational by mid-late 2022. We expect the group to continue expanding its portfolio of JVs and associates through strategic partnerships with OEMs.

Completion of sale of associate AMSA will lead to divestment gains.

  • SIA Engineering completed the divestment of Aircraft Maintenance Services Pty Ltd (AMSA) in December 2018. The company will be recording a one-time divestment gain of S$5.5m in 4QFY19. Factoring in these gains and slightly higher JV/associate earnings in 4QFY19, our headline net profit forecast for FY19 does not change materially despite the one-offs in 3QFY19.
  • Our forecasts for FY20/21 remain unchanged, though there could be upside potential if SIA Engineering is able to outperform our conservative operating margin estimates.

But dividends in FY19 likely to be lower y-o-y.

  • Operating cash flow was modestly positive at S$5.3m in 3QFY19, and 9MFY19 operating cash flow stood at a muted S$57.7m. However, dividends received from associates/JVs of S$41.5m (+58% y-o-y, +190% q-o-q) in 3QFY19 was the highest recorded in the past 5 years.
  • Coupled with sound fiscal prudence (9MFY19 capex of S$18.7m was down 29% y-o-y and trended lower than our FY19 projections), balance sheet overall still remains in a strong net cash position of around S$451m.
  • However, given the reduced headline profits in FY19 owing to previously stated one-off events, and the lower interim dividend of 3Scts per share in 1HFY19, we expect 9Scts final dividend and 12Scts total dividend for FY19 (payout ratio of c. 89%), which is lower than last year’s total dividend of 13Scts per share. That implies a yield of around 4.8% at current SIA Engineering’s share price

Suvro Sarkar DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-02-11
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.70 DOWN 2.940