May 16, 2017

SIA Engineering Company Ltd’s (SIAEC) FY17 core PATMI was above our expectations as it fell 13.4% to S$165.0m. SIAEC recorded S$141.6m in divestment gain and S$36.4m in special dividend from HAESL in FY17. Operating expenses increased 2.4% to S$1032.1m, largely due to one-off provision of staff costs arising from the divestment as well.

FY17 revenue fell 0.8% to S$1104.1m, mitigated by higher line maintenance (LM) revenue (+11.5%), due to more flights handled at Changi Airport and reorganization of business, where some of the aircraft & component overhaul services (ACS) works and headcount were transferred to LM.

FY17 share of profits of associated and JV companies grew 2.4% to S$96.5m, mainly driven by higher work content at its associate due to extension of use for end-of-cycle aircraft fleet (e.g. B747), which we believe to be non-recurring.

Near-term, ACS will likely remain muted though we expect LM revenue to grow steadily as the traditional heavier checks on new-generation aircraft are now broken down into multiple phases on the apron itself. Management has also highlighted they plan to increase their LM presence in more airports over time, including through JVs and partnerships. Over the longer-term, we believe SIAEC will benefit from the growth in aircraft fleet worldwide.

SIAEC is recommending a special dividend of S$0.05/share in addition to the S$0.09/share final dividend, bringing the total dividend payment for FY17 to S$0.18 (FY16: S$0.14).

We switch from DDM-based to DCF-based valuation to reflect a solid balance sheet, and long-term business stability as it adapts to the new aircraft maintenance trend. Consequently, FV increases from S$3.58 to S$3.75, maintain HOLD. –OCBC

SIA Engineering closed at: S$3.950