Improving balance efficiency or arresting working capital squeeze?: We estimate net gearing to rise to 1-2%. The move could improve balance sheet efficiency given the historical net cash position. However, drawing down 42% of the MTN program raises concern that a significant part of the proceeds could be used to address near-term working capital needs. We estimate that cash conversion cycle increased from 50 days (1Q08) to 69 days (1Q09), translating to an additional ~S$280million annual working capital needs. Channel checks also suggest that MRO rates remain under pressure. The upcoming 1H09 results (early August) should provide greater clarity on the working capital situation and key rationale for the notes issue.
Gearing up for M&A: Management signals potential M&A in the pipeline. Assuming the proceeds are deployed to repay current borrowings and fund incremental working capital, there should still be at least S$200million for M&A. Likely candidates may include the in-house MRO units of distressed airlines looking to spin off and outsource their MRO work to manage costs. Historical share price performance post announcement of M&A deals have been mixed (Table 1), although there was greater visibility of synergies and earnings accretion at Aerospace and Marine, in our view, in the cases of the Panama MRO facilities (PAE) in Feb-06 and Halter Marine in July-02.
Dividend risk reduced, but “cash-rich premium” no more: The bond issue alleviates concerns over dividend risk but we note that the potential move into a net gearing position should remove the “cash-rich premium” that the market has traditionally placed on the stock.
Current valuation looks rich: Recent share price performance puts the stock at 16.4x/16.0x JPM/consensus P/E, which we see as unattractive versus the peer average of 9x. Maintain UW.
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