SIA Engineering (SIE SP) - UOB Kay Hian 2018-02-05: 3QFY18 Exceeds Expectations On Higher JV & Associate Income

SIA Engineering (SIE SP) - UOB Kay Hian 2018-02-05: 3QFY18 Exceeds Expectations On Higher JV & Associate Income SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - 3QFY18 Exceeds Expectations On Higher JV & Associate Income

  • SIA Engineering's 3QFY18 headline net profit and core net profit rose 4.2% y-o-y and 8.9% y-o-y respectively on higher JV & assoc income. 
  • The declines in staff and subcontract costs are positive surprises. Consequently, we raise our FY18-19 net profit forecasts by 9.4% and 4.7%. 
  • At our target price, the stock would trade at ex-cash PE of 22.6x and 20.2x FY18-19 core earnings respectively. 
  • Maintain BUY and target price of S$4.00.



RESULTS


Beats expectations on higher JV & associate income. 

  • SIA Engineering’s (SIAEC) 9MFY18 headline net profit and core net profit amounted to 82.0% and 87.5% of consensus full-year estimates respectively. In comparison, 9MFY18 headline net profit made up 72.5% of our FY18 estimate with core net profit more broadly in line at 78.9%.
  • Line maintenance revenue improved during the quarter, and we believe this was in line with Changi Airport’s aircraft flights movements, which rose 3.8% y-o-y in Oct-Dec 17. 
  • At the non-operating level, JV & associate income accounted for 67.7% (+14.9pt y-o-y) of 3QFY18 net profit and grew 29.1% y-o-y, presumably due to growth in the engine repair and overhaul segment.
  • Excluding forex impact, operating profit remained relatively flat y-o-y. SIAEC recorded forex loss of S$1.7m (2QFY18: forex gains of S$4.8m) due to a weaker US dollar. Excluding the forex impact, operating profit would have declined only 2.4% y-o-y.

Better cost management. 

  • SIAEC’s efforts to improve efficiency have proven worthwhile as both staff and sub-contract costs declined 1.4% y-o-y and 5% y-o-y respectively. This is a key positive as staff cost has not declined in almost two years and accounted for more than 46% of total revenue in 3QFY18.

JV & associate income likely to have benefitted from higher shop visits. 

  • The 29.1% yoy increase in engine MRO was largely due to higher income from JVs which grew 60% yoy and a whopping 387% q-o-q. We infer that this was due to greater shop visits to Singapore Aero Engine Services (SAESL), as highlighted in our previous report. 
  • SAESL accounted for a significant majority of JV income in FY17. We believe that JV & associate income will continue to grow as SIAEC will benefit, via Heavy Maintenance Singapore Services (HMS), from Singapore Airlines’ plans to retrofit 14 of its A380s with an updated interior by 2020. 
  • Additionally, the 9MFY18 dividend payout from JV & associates exceeded our expectations as SIAEC reported a payout ratio of 86% vs our estimate of 65%. On an annualised basis, 9MFY18 ROE for JVs & associates amounted to an attractive rate of 21%.


STOCK IMPACT


Better cost management and higher JV & associate income are key positives.

  • Although top-line remained flat y-o-y, staff cost declined 1.4%. This bodes well for the future as staff cost has consistently risen y-o-y since 1QFY17. As expected, JV & associate income continued to rise y-o-y for the fourth consecutive quarter and accounted for an astonishing 67.7% of 3QFY18 earnings. 
  • Going forward, we expect JV & associate income to rise further on the back of higher engine shop visits.


EARNINGS REVISION/RISK

  • We raise our FY18 and FY19 net profit forecasts by 9.4% and 4.7% respectively as we take into account higher income from JV & associates, and lower staff cost. 
  • We also lower our tax rates for FY18 and FY19 by 0.6ppt to 10.4% each.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$4.00. 
  • We continue to value SIAEC using DCF basis but include dividends from JV and associates (WACC: 5.5%, long-term growth: 1.5%). 
  • At S$4.00, SIAEC offers FY18 and FY19 dividend yields of 4% and 3.8% with ex-cash PE of 22.6x and 20.2x respectively.


SHARE PRICE CATALYST

  • No immediate catalyst.




K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.000 Same 4.000



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