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Morningstar | Swire Pacific's 1H Result in Line; Beverages and Properties Offset Persistent Struggle for SPO

There is little in Swire Pacific’s first-half result that alters our view on the conglomerate. We reaffirm our fair value estimate of HKD 87 per share and believe the company is fairly valued. We continue to see significant improvements for Cathay Pacific and a meaningful turnaround of Swire Pacific Offshore as the two key drivers of a positive revision to our fair value estimate. We have not factored the above into our current valuation. A 20% increase in the first-half dividend to HKD 1.20 was a surprise, and we assume a similar increase for the final dividend, taking our full-year forecast to HKD 2.54. Rental income and earnings for Swire Properties were up 8% and 6%, respectively; there is no change in our view that the properties division will remain the core earnings driver for the group. This is also supported by growth in the beverages division.

Higher volume and pricing across all geographies underpinned strong growth for beverages. The realignment of geographies in China in 2017 saw the consolidation of infrastructure and better planning. We believe the operational improvements will continue to drive better profitability at the group, though management said an increase in raw material prices may damp growth in the second half. The outlook was generally positive, with higher sales volume and revenue expected across all operating geographies.

The HKD 3.9 billion write-down for SPO was guided for last month, and the first-half loss of HKD 650 million was slightly better than the HKD 663 million guidance excluding the write-down. As we said in our July 23 note, the write-down was not a surprise as we expected low utilisation rates to persist despite a recovery in oil prices. Positively, there are signs of improvement depending on the type of vessels. Utilisation of tug supply vessels and platforms supply vessels was higher at 73.5%, compared with 64.3% at the end of last year. This was offset by lower charter rates of USD 10,900 per day. In contrast, construction and specialist list vessels and subsea vessels saw lower utilisation rates but an improvement in charter hire rates. Operating expense was 4% higher in the first half, and with operating costs remaining at their current level, we do not expect SPO to break even in our explicit forecast period, despite slight improvements in charter rates and utilisation rates.

Haeco reported a stronger first-half result, mainly driven by its engine servicing business in Hong Kong. More work was completed there with 91 engines serviced, compared with 71 the previous year. Haeco Xiamen’s result was resilient with airframe services man-hours steady at 2.03 million. Deferral of work by some customers to the second half resulted in a 9% decline in airframe services man-hours sold in Hong Kong. The deferral should help offset the seasonally weaker second half, as demand for aircraft is higher for the summer holidays and December travelling season. Haeco America remains a challenge with another loss for the half, but losses have narrowed. Outlook for the operation is mixed with more airframe services expected, offset by weaker forward booking for cabin reconfiguration.

For a summary of the Cathay Pacific result, please refer to our Aug. 8 note "The Worst Is Over for Cathay; FVE Lifted to HKD 12.20." For detailed coverage on Swire Properties, please refer to our Aug. 9 note "In-Line Interim for Swire, With Modest Rental Growth Offsetting Lower Property Trading Earnings."