SIA Engineering Company Ltd - Phillip Securities 2018-02-05: Lifted By Strong JV And Stable Associated Companies

SIA Engineering Company Ltd - Phillip Securities 2018-02-05: Lifted By Strong JV And Stable Associated Companies SIA ENGINEERING CO LTD S59.SI

SIA Engineering Company Ltd - Lifted By Strong JV And Stable Associated Companies

  • SIA Engineering Company Ltd's PATMI was 44% higher than expected, driven by positive surprise from JV.
  • 9M18 revenue, EBIT and PATMI met 74%, 68% and 82%, respectively of consensus full year expectation.
  • Strong contribution from JV and stable performance of associates compensated for the weaker core company EBIT to lift PATMI.
  • Upgrade to ACCUMULATE, on the belief that the worst is behind us for JV contribution.



The Positives

  • ➕ Contribution from associated & JV companies grew 29.1% y-o-y. This was mainly due to contributions from the repair and overhaul centres, which saw a $9.1mn or 29.6% y-o-y increase. Share of profits from line maintenance segment remained flat.
  • ➕ Positive surprise of 60% y-o-y and 387% q-o-q higher profit of $22.9mn from JV. The increase in contribution from associated & JV companies was substantially attributable to the Singapore Aero Engine Services Pte Ltd (SAESL) JV, which deals in Rolls Royce engine and component repair and overhaul. 
  • The sharp increase after three consecutive quarters of under S$5.0mn contribution came as a surprise, in view of the ongoing structural issue of new engines requiring less frequent servicing and lower work content.
  • ➕ Contribution from associates remained stable y-o-y at $17.9mn, indicating that contribution from Eagle Services Asia (ESA), a Pratt & Whitney associated company, remained stable.


The Negatives

  • ➖ Core company EBIT remains weak, coming in lower than our 3Q18 and the Street’s 9M18 estimates: 3Q18 staff costs (largest cost component) was 1.4% y-o-y lower, but material costs (second largest cost component) was 5.5% y-o-y higher. 
  • The largest movement was the S$5.8mn or 31% y-o-y increase in other operating expenses. The 2.3% YoY higher opex aggravated the already lower revenue.


Outlook


The outlook remains challenging.

  • Despite the positive surprise for JV, we are not ready to call a return to historical normalised levels. The same level of 3Q18’s $22.9mn JV contribution was last seen in FY14, and we think such a V-shaped recovery is unlikely, in view of the structural issue mentioned above. 
  • While the worst may be over for JV contribution, we are inclined to believe that the long-term normalised contribution will still be lower than historical level.


Upgrade to ACCUMULATE (from Neutral); higher target price of S$3.51 (previously $3.35)

  • Our FY18e/FY19e estimate for profit contribution from associates & JVs is 32%/16% higher than previous. Consequently, our FY18e/FY19e PATMI estimates are 15.6%/5.6% higher than previous.
  • SIA Engineering's FY17 dividend distribution of 13.0 cents should be sustainable for FY18e (3.9% yield), in view of the positive free cash flow, dividends received from associated & JV companies and a balance sheet that is in a net cash position. (1H18 interim dividend of 4 cents was unchanged from 1H17.)




Richard Leow CFA Phillip Securities | https://www.stocksbnb.com/ 2018-02-05
Phillip Securities SGX Stock Analyst Report ACCUMULATE Upgrade NEUTRAL 3.51 Up 3.350



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