SIA Engineering

SIA Engineering (SIAE) reported weaker-than-expected 2QFY17 net profit of $35.5 (-20.2%), taking 1HFY17 earnings to $233.9m, which included a one-off divestment gain of $160.4m from the restructuring of its Rolls-Royce JVs.

Stripping that out, 1HFY17 core profit would have fallen 14.3% to $73.5m, missing full year street estimates.

For the quarter, revenue dipped 0.5% to $264.8m due to lower fleet management income, partially mitigated by higher contributions from its line maintenance segment.

Operating margin narrowed to 9.3% (-0.9ppt) on higher staff (+3.4%) and material (+9.3%) costs, which were offset in part by lower subcontract costs (-15.8%).

Notably, operating cash outflow more than doubled to $18.2m on working capital changes. Despite this, SIAE's net cash position ballooned to $507.5m (+40.7%) mainly due to the cash consideration received from its divestment of 10% stake in HAESL and 20% stake in SAESL to Rolls-Royce in 1QFY17.

A negative surprise however, came in the form of a cut in interim DPS to 4¢ (2QFY17: 6¢), giving a trailing 12-month yield of 3.3%.

Taken together with management's cautious guidance, Maybank KE believes that SIAE's near term performance could be overshadowed by continued weak workloads for its MRO business.

Separately, the group divested a 2.6% stake in its 49:51 JVCo, Component Aerospace Singapore, to its JV partner Pratt & Whitney for US$2.7m. The deal is intended to integrate JV operations and will result in a divestment gain of US$1.5m upon completion.

In light of this, the Maybank KE remains hopeful of a special DPS payout. After factoring in the lower interim payout, MKE expects FY17 DPS of 21¢, suggesting a FY17 yield of 5.7%.

The house thus reiterates its Hold rating with unchanged TP of $3.70.

At current prices, SIAE trades at 20.4x forward P/E. The street has 1 Buy, 3 Hold and 2 Sell ratings on the counter with consensus TP of $3.98.

Latest broker ratings:
UOB Kay Hian maintains Sell with TP of $3.40
OCBC maintains Hold but cuts TP to $3.63 from $3.70
Maybank KE maintains Hold with TP of $3.70
CIMB maintains Add with TP of $4.16