• 3Q14 basic EPS down 11% YoY
• Rising costs
• Maintain HOLD

3Q14 disappointment

SIA Engineering Company's (SIAEC) 3Q14 results missed ours and the street's expectations. 9M14 basic EPS of 18.0 S cents formed 70% of ours and the street's prior FY14 estimates. 3Q14 revenue climbed 2.0% YoY to S$283.8m but operating profit fell 19.2% to S$25.2m due to staff, subcontract and material costs. Share of profits from associated and JV companies expanded by only 2.5% to S$41.0m, representing a contribution of 58.7% of the group's pre-tax profits. 3Q14 PATMI thus contracted 9.7% to S$60.5m. 3Q14 basic EPS of 5.43 S cents is down 10.7%. 9M14 PATMI and basic EPS are down 1.8% and 2.8% respectively. Foreign exchange movement was less favourable in 3Q14 for SIAEC, with an FX gain of S$0.1m clocked (versus S$1.6m a year ago).

Compressed operating margin

3Q14 salary costs increased 1.5% YoY to S$126.7m. Overheads (depreciation, amortization of intangibles, company accommodation and other operating expenses) jumped 8.1% to S$45.6m Subcontract services rose 6.9% to S$35.7m and material cost expanded by 8.6% to S$50.6m. In sum, expenditure rose 4.7% to S$258.6m. Operating profit margin at 8.9% was significantly lower than the 11.2% a year ago.

Cost pressures

Management sees rising business costs, especially labour costs, as a continuing operational challenge. Management also expects that the group's business will remain stable despite the uncertainties in the world economy. The company will continue focusing on improving productivity and minimizing costs.

Maintain HOLD

We lower our FY14F basic EPS forecast to 24.2 S cents, 6% lower than our previous estimate of 25.7 S cents. Rolling forward our model to FY15F figures, we reduce our FV from S$5.14 to S$4.77 (based on EPS forecast of 25.1 S cents and a lower peg of 19.0x, versus 20.0x previously). We maintain a HOLD rating on SIAEC and forecast a FY15F dividend yield of 4.6%.

Source: OCBC Research - 4 Feb 2014