SIAEC – Kim Eng

Time to Fly, Time to BUY

Upgrade on relative valuations, attractive yields. We upgrade SIA Engineering (SIE) to a BUY based on undemanding valuations versus its peers like ST Engineering and HK Aircraft Engineering Co (HAECO) and attractive dividend yields of 5.1-5.6% p.a. Our target price of SGD4.95 implies 15% upside, backed by resilient earnings and strong cashflows. We continue to like the aviation engineering sector for its resilient growth prospects.

Under-appreciated within sector. Headlining our rationale for upgrading SIE is its relative value that has emerged within the aviation

maintenance, repair and overhaul (MRO) sector. SIE currently trades at a lower PER of 16x versus its peer average of 18.3x, while dividend yield of ~5.3% is a full percentage point higher than its peer average of 4.3%.

Sector outlook rosy, SIE well-poised to benefit. Industry forecasts for the aviation MRO sector are still showcasing steady growth especially in Asia. In addition, we favour SIE for its ability to continue growing its non-SIA customer base as an affirmation of its service quality. This allows SIE an enviable balance between a diversified customer base and a foundation to lean on: SIA’s MRO business.

Resilient business supports attractive yields. SIE’s record of profitability seems to corroborate the thesis of resilience within the aviation MRO sector. Even during times of global economic crises, SIE’s earnings remained stable and, together with strong cashflows, formed the basis of an increasing dividend payout trend.

Favoured play in aviation engineering: Upgrade to BUY. We now peg SIE’s valuation based on 18.3x FY3/14 PER, one standard deviation above its historical mean. Target price is accordingly raised to SGD4.95, implying 15% upside with an attractive 5.3% dividend yield adding to its investment case. SIE is now our pick in the aviation MRO sector based on its undemanding relative valuations. Upgrade to BUY.

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