SIA Engineering growth hinged on joint ventures success

A big chunk of its profits now come from this lucrative segment and the outlook is only getting rosier by the minute.

SIA Engineering shows particular promise in Engine joint ventures, observes PhillipCapital in its equities research. The airline engineering firm has forged key partnerships with Rolls Royce and Pratt & Whitney, among other OEMs, which will all but ensure its dominance and earnings growth in the segment.

Here's more from PhillipCapital:

SIAEC reported an increase in profits of 4% on a 6% increase in sales. Operating profits declined with sales cannibalized to an Associated company and margin compression due to higher subcontracting expenses. Associates & Joint Ventures reported stronger contributions mainly due to higher profits at the Engine business. Final dividend increased by 1.0 cent, bringing total DPS for the year to 21.0 cents. Management guided for stable business demand in the near term.

The results were in line with our expectations. The Group’s cash balance increased to S$498mn, due to the low amount of CAPEX incurred in the year. While final DPS increased as compared to last year, we think that there is scope for higher cash distributions with its strong and ungeared balance sheet. We think that the future source of growth lies in the JVs and Associates.

Operating Statistics. Flights handled by SIAEC in Changi Airport continued its growth trajectory, benefitting from the increase in visitor arrivals in Singapore. However, SIAEC may have lost some market share in the year as flights handled increased at a slower pace than activities at the airport. The company’s hangars were busy with utilization of above 80%.

The potential in its Engine business. We believe that the potential for growth in the Group lies in its Engine joint ventures. The Group derives half of its profits from its joint venture companies, of which 90% are in the Engine related business. These strategic alliances with the OEMs (Rolls Royce, Pratt & Whitney etc.) ensure that they would stay relevant in the marketplace and have access to the latest technologies, which the OEMs tightly control.

Free Cashflows to continue. Over the next few years, we expect SIAEC to generate operating cashflows of c.S$115-160mn/yr. With the steady growth in its joint ventures, we expect them to return cash dividends higher than operating cashflows levels as they mature. With low CAPEX requirements of S$30-70mn/yr, its strong Free Cashflow (FCF) generation would allow for consistent levels of cash distributions to shareholders.