SIA Engineering (SIE:SP) share price drop triggered by block trade, not fundamentals

Fair value: S$4.50
Rating: Outperform

4 October 2017, Singapore – SIA Engineering (SIE:SP)’s share price fell 5% to S$3.28 this morning. We believe this was mainly driven by a substantial block trade of 38.9m shares which amounts to a hefty 3.5% of SIA Engineering’s total shares outstanding, rather than fundamentals. Singapore Airlines Limited just announced that it has not sold any SIA Engineering shares. These shares were from an institutional investor.

Although the MRO sector outlook is still challenging near term, it is not getting materially worse and we remain bullish on SIA Engineering’s longer term prospects. Several game-changing business developments, mostly partnerships with global leading OEMs, have been achieved in this new financial year, including its 49%-owned Moog JV announced overnight. These ventures will significantly enhance SIA Engineering’s capabilities and competitive advantage, providing new earnings growth drivers in the longer term. Given its net cash position and positive free cash flow generation, SIA Engineering can comfortably sustain a dividend yield of 4% per annum. Historically, special dividends have also been announced every three years when its net cash balance swelled above S$500m.

OVERHANG FROM HUGE BLOCK OF SHARES FOR SALE

J.P. Morgan (JPM:US) bought this block from an institutional investor and is re-offering these shares at S$3.11 to S$3.30 per share, implying a 4.6% to 10.1% discount to yesterday’s closing share price of S$3.46. Due to SIA Engineering (SIE:SP)’s low free float of 22% and low average trading liquidity averaging only 0.3m shares per day in the past year, selling such a large block has the effect of dampening its share price. Singapore Airlines (SIA:SP) owns a 78% stake in SIA Engineering. Singapore Airlines (SIE:SP) just announced that it has not sold any SIA Engineering shares. 

Chart: SIA Engineering shareholding structure

Chart: SIA Engineering shareholding structure

RECENT BUSINESS DEVELOPMENTS POSITIVE

Two new developments were announced by SIA Engineering in the past week which are neutral to positive:

1) Last night, SIA Engineering announced it has incorporated a 49%-owned joint venture Moog Aircraft Services Asia Pte Ltd with Moog MOG/A:US (which will hold the remaining 51% stake) which is a positive development. This will be a new long-term growth driver for SIA Engineering as the JV will be Moog’s Centre of Excellence in the Asia Pacific region for its products fitted on the new generation Boeing 787 and Airbus A350 aircraft. This JV will provide Maintenance, repair & overhaul (MRO) services for Moog manufactured flight control systems that are fitted on new generation aircraft including the B787s and A350s.

2) SIA Engineering has appointed a new Chief Financial Officer Ms Ng Lay Pheng following the retirement of Ms Anne Ang. We have interacted with Ms Ng on numerous occasions and given her long career experience in the Finance and Treasury divisions of both SIA Engineering and the broader SIA Group, we do not foresee any issues arising from the transition.

STILL A LONG-TERM WINNER IN THE MRO SECTOR WITH ATTRACTIVE DIVIDEND YIELD

Although the MRO sector outlook is still challenging near term, it is not getting materially worse and we remain bullish on SIA Engineering’s longer term prospects. Several game-changing business developments, mostly partnerships with global leading OEMs, have been achieved during this new financial year. These will significantly enhance SIA Engineering’s capabilities and competitive advantage, providing new earnings growth drivers in the longer term. Given its net cash position and positive free cash flow generation, SIA Engineering can comfortably sustain a dividend yield of 4% per annum. Historically, special dividends have also been announced every three years when its net cash balance swelled to more than S$500m.

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