• Growth at associate likely nonrecurring
• Special dividend of S$0.05/share
• Maintain HOLD on higher FV

Core FY17 PATMI Formed 113% of Our FY17 Forecast

SIA Engineering Company Ltd’s (SIAEC) FY17 core PATMI was above our expectations as it fell 13.4% to S$165.0m. Recall that 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 but was 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%).

Growth in LM was largely 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 given some of these maintenance works are now being performed on the apron instead of in the hangar.

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 nonrecurring. 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).

Line Maintenance the Longer-term Bright Spot

Over the near-term, ACS will likely remain muted given the lower work content required and longer maintenance intervals on new aircraft/engine models. However, we also 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 to reduce aircraft ground time in the hangars. 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.

Decent FY18 Dividend Yield of 3.3%

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

Source: OCBC Research - 16 May 2017