SINGAPORE (Feb 7): Maybank Kim Eng and CIMB are keeping SIA Engineering at “hold” as the research houses await a visible recovery in MRO (maintenance, repair and overhaul) volume and near-term growth outlook for the sector remains challenging.
3Q17 headline net profit of $52.6 million included a $2.3 million gain on partial disposal of an associate while year to date of $159 million included $178 million from restructuring of its Rolls-Royce JV and an increase in related staff cost of $23.1 million. Excluding various one-offs, 3Q17 core profit declined 10.5% y-o-y but grew a significant 40% sequentially from 2Q17 which was affected by various divestments.
CIMB says SIA Engineering’s 3Q17 revenue of $272 million was in line with its expectations. Key to underperformance was lower fleet management although this was mitigated by higher line maintenance revenue.
Nevertheless, new strategic partnerships are in the works. “Recent developments include an agreement with Moog Inc to establish a JV to overhaul products like components for flight control systems in new generation aircraft and a JV with Airbus for heavy maintenance services that SIA Engineering expects will help tap a larger target client market,” says Maybank’s Derrick Heng. “Management are optimistic about prospects for these ventures but do not expect them to be profit accretive in the near term.”
CIMB likes SIA Engineering for its strong balance sheet with net cash of $530.5 million. The house also remains hopeful of a special dividend in 4Q17. “In 2Q17, management guided for 80-90% dividend payout on recurring earnings which translates into FY17 DPS of 12-13.5 cents,” says analyst Lim Siew Khee.
“Assuming SIA Engineering distributes 50% of the HAESL $160 million gain, DPS could be increased by another 7 cents, bringing total DPS to 19-20.5 cents (5% yield),” adds Lim.
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“SIA Engineering is a beneficiary of long term trend of rising air travel in the region,” says Maybank’s Heng, “Its strategy of pursuing partnerships with key OEM component and aircraft manufacturers positions it competitively in the marketplace.”
CIMB and Maybank have target prices of $3.77 and $3.70 respectively. The stock is trading 2 cents higher at $3.50 as at 12.29pm.
