SIA Engineering

SIA Engineering: Restructuring its engine JVs with Rolls Royce and HAECO.

In short, it is divesting its 10% stake in HAESL and a 2% effective stake in SAESL for $201.9m in cash, and will book a gain of $186.8m

As part of the restructuring, RR has also replaced its geographic territory based work arrangement with a competitive omdel, where each engine shop competes for overhaul work.

Despite this shift in business model, Rolls Royce has committed to a predetermined amount of workload for SAESL from 2016 to 2030.

Maybank-KE opines that SIAEC could share part of the proceeds to shareholders. Assuming half of the proceeds are distributed, it could pay a special DPS of 9¢. If this is added to the forecasted core DPS of 14.5¢, the FY3/16 payout could come to 23.5¢, or a 6.4% yield.

The stock may react positively to the near term prospects of a special DPS, but Maybank-KE sees a slight negative from a more competitive business landscape.

Under the old regime, all Trent engine maintenance work in APAC is dominated by SAESL and HAESL. In the new regime however, all authorised engine shops can compete and secure work globally. Nevertheless, Maybank-KE is not too concerned as the maintenance of Trent engines remain a very niche offering.

Maybank-KE adjusts maintains Hold on SIAEC, but cuts TP to $3.61 from $3.75, factoring into account the removal of contributions from HAESL.

SIAEC is currently trading at 23.6x FY3/16e P/E.