SIAEC – CIMB

Take a breather

This is the time to book some profits off SIA Engineering on unexciting3Q13 results and 33% share price outperformance since Jan2012. We believe capacity growth in Changi Airport and high hangar utilisation from airframe maintenance have been factored in.

3Q13 net profit is 10% below our expectations and 6% below consensus on lower-than-expected revenue. However, 9M13 is broadly in line, at 71% of our FY13 forecasts, thanks to a strong 1H13. We maintain our EPS forecasts and blended P/E and DCF-based target price. We think the valuation is stretched at 18x CY13 P/E, near its peak of 19x. However, we maintain our Neutral rating on decent dividend yield of 4.5%.

Lower fleet and project revenue

3Q13 revenue fell 8% yoy and 2% qoq from lower fleet management and project revenue (lumpier in nature). We believe line maintenance volumes could be higher (breakdown of revenue by business segment was not disclosed), helped by the 2% qoq annualised growth in aircraft movement in Changi Airport in Oct-Dec 2012. Airframe & component overhaul (typically contributes 48% of the group’s revenue) should remain stable.

Gradual margin improvement

EBITDA margin inched up to 14.3% (2Q13: 13.9%, 3Q12: 12.3%) due to lower subcontract services and material costs, a reflection of lower project revenue. The margin also improved due to an S$0.8m forex gain in 3Q13.

Associates and JVs benefit from stronger US$ qoq

Associates profit was up 8% qoq, but down 27% yoy to S$17.5m. JV profits remained stable qoq and rose 22% yoy to S$22.5m. We think this is due to higher market share of Rolls Royce engines (serviced by SIE’s associate Eagle Services) over Pratt & Whitney engines (serviced by SIE’s JV, SAESL) globally. Stronger US$/S$ from 2Q13 to 3Q13 (exchange rate of 1.22-1.25) could have helped in the translation of profits.

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