SIAEC – DBSV
Rising labour costs a worry
- 3Q FY14 net profit down 10% y-o-y, misses estimates • Rising labour costs a drag on core operating profits, mitigated partly by higher JV/ assoc contributions
- Cut FY14/15 earnings estimates by 4-5%
- Dividend potential is key silver lining; maintain HOLD rating with lower TP of S$4.80
Core operating profit weaker y-o-y. 3Q FY14 net profit fell 10% y-o-y to S$60.5m, dragged down by high operating costs at SIAEC level, largely staff costs and overheads. Operating margin was the weakest in over four years at 8.9%, and significantly below FY13 margin (11.2%). Given that 1H FY14 operating margin was not much stronger either at 9.6%, 9M FY14 net profit edged down 2% to S$200.5m despite flattish revenues.
Higher JV/ associates’ contributions offset weak core profit. Contribution from JV/ associates grew 2.5% y-o-y to S$41m in 3Q FY14, and is up almost 14% in 9M FY14 to account for 59% of Group PBT. The engine MRO centers and other JV/ associates have been posting rising contributions due to the cluster of strategic partnerships that SIE has established in various pockets of the MRO value chain in recent years.
Rising costs a challenge. Although demand for the Group’s core MRO services should be stable in the near term, margins may be pressured by rising labour costs and inflation at its home base in Singapore. As a result, we cut FY14/15 earnings estimates by 4-5%. Earnings are now forecast to be flat in FY14 and see tepid growth at best in FY15/16.
Special dividend may be only catalyst. SIE should end FY14 with over S$500m cash holding, and there remains the small possibility of a special dividend in addition to our forecast 15Scts final dividend for FY14 (interim: 7 Scts already paid out). But chances are slim given the weak operating performance. Hence, we maintain our HOLD call for SIE and revise down our TP to S$4.80 after adjustments to bring the stock in line with current peer valuation metrics.