SIA ENGINEERING CO LTD (SGX:S59)
SIA Engineering Company Ltd - Saved By Associated & Joint-Venture Companies
- SIAEC's 1H revenue and PATMI were 4.5% and 13.6% lower respectively than our estimate.
- Lower 1H EBIT was completely offset by higher associates/JVs.
- 3 cents interim dividend declared, lower than last year's 4 cents.
- Downgrade to NEUTRAL, new target price of $2.81 (previously $3.56) as we cut our FY19e and FY20e earnings estimate by 16% and 14%.
The Positives
Strong contribution from Associates & JV fully compensated lower EBIT.
- This came mainly from the engine and component centres (+41% y-o-y). SAESL (JV with Rolls-Royce) had benefitted from the ongoing Trent 1000 issues of durability and replacement of affected parts, resulting in higher shop visits. Eagles Services Asia (ESA, associated company with Pratt & Whitney) saw more engines and higher work content. However, the PW4000 engine will eventually be phased out, and ESA has built up capabilities to service the new GP7200 and GTF engines.
- As such, we expect the annual combined base load from SAESL and Eagle to remain relatively stable at ~$80mn for at least the next 1 to 2 years.
The Negatives
Core Company EBIT continues to weaken.
- Larger variable costs such as labour, material and subcontract were lower y-o-y, but it was insufficient to mitigate the lower revenue. The Airframe overhaul and line maintenance business unit was the largest contributor to lower revenue.
- Lower number of 'C' Checks because they of heavier work content compared to last year and this resulted in a longer turnaround (i.e. lower throughput).
Y-o-y lower 1H interim dividend, despite 4.2% y-o-y higher 1H PATMI.
- This resulted in a lower payout ratio of 42.7% compared to 59.5% last year. Management commented that it was a Board decision to be conservative as SIAEC is going through a transformation of embarking on forming new partnerships and capabilities.
- The lower interim dividend should not be taken as a signal that the final dividend would be lower as well; the Board will reassess the situation and there is the possibility for full year dividend to at least be equal to last year.
Outlook
- The outlook is challenging. SIAEC operations remain challenged by longer maintenance intervals and lighter work content, but there appears to be a pipeline for engine shop visits at the associates/JV level which will contribute positively.
- We see a trend of increasing proportion of bottom line contribution coming from associates/JV.
Downgrade to Neutral; new target price of S$2.81 (previously $3.56)
- We have cut our estimates for the SIAEC. Consequently, FY19e/FY20e PATMI are - 16%/-14% lower than previous.
- SIAEC is in a net cash position and offers a dividend yield of 4.1%.
- Our target price gives an implied FY19e forward P/E multiple of 20.6 times.
Richard Leow CFA
Phillip Securities Research
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https://www.stocksbnb.com/
2018-11-12
SGX Stock
Analyst Report
2.81
DOWN
3.560
