SIAEC – CIMB
Near peak, switch to SATS
SIA Eng’s share price has outperformed the index by 33% since Jan 12 and now trades close to its historical peak. We recommend switching to SATS to take advantage of the capacity growth in Changi Airport, with easing food inflation being an additional catalyst.
Downgrade to Neutral from Outperform with unchanged target price, on blended P/E and DCF valuations. Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, we still like its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings. Our EPS remains intact. We will revisit this stock on margin expansion or stronger-than-expected volume from airframe maintenance.
At 18x CY13 P/E and 4.3x CY12 P/BV, SIE is trading above +1 s.d. of its 5-year mean, with an implied earnings growth of 12% from FY13-15. This suggests a much more bullish outlook of MRO spending vs. the global industry forecast of 4%. We note that SIE has only achieved an average growth of 3% since 2007. The upside risks to our argument could come from stronger-than-expected (85%) dividend payout in FY13.
Strong growth in Changi factored in
We believe the recent share price surge is partly due to optimism over Changi’s breakthrough, with an average of 920 flights handled per day, crossing the 900 mark for the first time. However we have factored in 9% yoy growth in FY13 for SIE’s line maintenance volume, which outpaced the expected growth in capacity expansion in Changi of about 4%.
Switch to SATS
SATS, with stronger earnings growth (3-year CAGR of 10%), could be a cheaper pick at 17x CY13 P/E vs. SIE’s 18x and lower earnings growth. Secondly, SATS has potential for margin expansion if food inflation is kept at bay (refer to Wen Ching Lee’s SATS report entitled “Ready for take-off” and dated 22 Jan 2013). Meanwhile, SIE’s margin is trending downwards on the back of higher subcontractor and materials costs. Finally, SATS offers higher share liquidity with a 57% free float vs. SIE’s 20%.