February 11, 2019

Associates and JV profit of S$19.2m was lower 36% qoq and 53% yoy in 3QFY19. The yoy dip was due to 1) revisions in fee structure of an engine shop in 2018 that evened out its revenue over the year instead of a lump sum adjustment in 3Q18 and 2) forex adjustment made for the functional currency change of an associate. The qoq dip was due to a one-time tax charge booked by some associated companies in 3Q19. The restructuring plans at the parent company of these associated companies affected certain qualifying criteria of their group tax incentive scheme. In the absence of an agreed revised tax incentive scheme, tax provision was revised upwards to the prevailing corporate tax rate. We believe little has changed in terms of firm demand for Trent 1000 engines for Rolls Royce which is likely to last over the next 1-2 years.

Revenue of S$256m in 3QFY19 was up 2% qoq and down 6% yoy. Cost control efforts were good as operating expenses remained flat qoq at S$240m. 9MFY19 EBITDA margin of 10% was in line with our expectations.

Net cash stood at S$450m with stronger yoy operating cashflows of c. S$40m as of 9MFY19 (9MFY18: S$16m). Dividend received from associates and JVs grew 17% yoy to S$86m.

Valuation at 18x FY20F P/E is decent, and below its 5-year average trading band of 26x. Dividend yield is also decent at 4.6%. Catalysts could come from stronger-than expected engine visits at associates/JVs or corporate action from the parent. Risks include a sudden slowdown in the aviation industry. Maintain Add and TP of S$3.11, based on DCF (WACC 6.9%)

SIA Engineering closed at: S$2.39