SIA Engineering (SIE SP) - UOB Kay Hian 2018-05-11: 4QFY18 Results Preview ~ Likely To Beat Street Estimates

SIA Engineering (SIE SP) - UOB Kay Hian 2018-05-11: 4qfy18 Results Preview: Likely To Beat Street Estimates SIA ENGINEERING CO LTD SGX: S59

SIA Engineering (SIE SP) - 4QFY18 Results Preview: Likely To Beat Street Estimates

  • We expect SIA Engineering (SIAEC) to beat the street’s full-year estimates when it releases its results on 15 May. Consensus numbers imply that SIAEC’s net profit would decline by 5.2% y-o-y. We think that is unlikely given that:
    1. the company had guided for S$14.4m in disposal gains in the final quarter, and
    2. improving engine maintenance income from associates.
  • Maintain BUY with an unchanged target price of S$4.00.



Street expectations are very low at S$172.6m for FY18, based on Bloomberg average estimates.

  • Given that SIAEC has already reported 9MFY18 net profit of S$129.1m, this implies that 4QFY18’s net profit would amount to S$43.5m or a 5.2% y-o-y decline. In contrast, we estimate that SIAEC would report S$66.5m in net profit for 4QFY18. 
  • We believe that the street has not factored in S$14.4m in the disposal gains from SIAEC’s divestment of Asian Compression Technology Services Limited (ACTS). This was announced in Jan 18/. If we exclude that, 4Q’s core net profit is estimated to rise 19% y-o-y, underpinned by higher contribution from SAESL. 
  • On the flip side, SIAEC could be affected by forex losses arising from a weak US Dollar.

Expecting 9.5 S cents in final dividend. In 1HFY18, SIAEC declared 6 S cents (+50% yoy) in interim dividend

  • We do not expect SIAEC to declare a special dividend as historically, the company only declares that once every four years and it has already done so last year. Our final dividend estimate of 9.5 S cents takes into account the gain of S$14.4m from the sale of ACTS, though theoretically, SIAEC could opt to pay out the proceeds from the disposal which could range from S$19m-24m. 
  • Collectively, we estimate a payout ratio of 88.5% and a cash earnings (net profit +D&A) payout ratio of 68%.


Key focus areas.

  1. Extent of losses at the repair and overhaul division,
  2. extent of improvement in JV& associate income, and
  3. 2H net margin for engine maintenance JV and associates.
  • The repair and overhaul operations have been in the red since 1H17 (SIAEC only provides the numbers every half yearly). If repair and overhaul losses are reduced, it could have a positive bearing on operating margins in the coming quarters. 
  • Next JV& associate income grew 29% in 3QFY18. We reckon that growth will be even stronger this quarter as we expect GE90 engine checks to have commenced in this quarter. If both volume and net margins improve from the paltry 1.3% in 1H18, then there is scope for further improvement when the Trent 1000 engine checks (arising from turbine blade corrosion) kick in coming quarters.


STOCK IMPACT

  • BUY SIAEC. We are relatively confident that SIAEC will be able to beat consensus estimates, even if numbers fall shy of our estimates. At current levels, SIAEC also offers a recurring enterprise FCF yield (FCF+dividends from associates as a proportion of enterprise value) of 4.8%. 
  • Payouts from associates could approximate 80% for the full year (9MFY18, payout was 86%) vs our initial estimate of 65%.


EARNINGS REVISION/RISK

  • No change in earnings.


VALUATION/RECOMMENDATION

  • Maintain BUY with a target price of S$4.00. We continue to value SIAEC using DCF basis but include dividends from associates and JV’s. (WACC: 5.5%, long-term growth rate of 1.5%). 
  • At S$4.00, SIAEC will offer a FY18 and FY19 dividend yield of 4% and 3.8% with an ex-cash PE of 20.8x and 20.0x respectively.


SHARE PRICE CATALYST

  • Better-than-expected results and guidance.





K Ajith UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 4.000 Same 4.000



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