SIAEC – DBSV

High flyer could take a breather

  • Results slightly below; 9MFY13 earnings growth of about 1% not exciting
  • Secure and attractive dividend expectations fuelled strong share price performance
  • Trading close to historic high valuations; further re-rating unlikely at this point
  • Downgrade to HOLD; TP revised up to S$4.80

Results fail to excite. 3Q-FYMar13 net profit of S$67m (up 6% y-o-y) was slightly lower than our projections, as revenue of S$278m (8% lower y-o-y) fell short of our estimate. The decline in revenue came from lower fleet management and project revenue. Operating margin was stable at 11.2%, compared to 11.1% achieved in FY12. Profits from JV/ associates remained largely stable at S$40m, accounting for close to 53% of group PBT in 3Q-FY13. Given that 9M-FY13 revenue and margins are lagging our estimates, we revise down our earnings projections for FY13/14 by about 2% each.

Steady outlook. Management expects that business should remain stable in 4Q-FY13 but macro uncertainties will continue to impact the aviation industry. Nevertheless, earnings for SIE should remain resilient and benefit from the expansion in traffic in the high growth Asia-pacific region, including its home base at Changi Airport, but growth in flight movements may decelerate due to high base effect.

But further re-rating unlikely. SIE’s solid balance sheet, steady earnings and attractive dividend outlook has been well appreciated by investors, resulting in strong re-rating in recent months. Even accounting for the prevailing yield compression story, the stock has not only outperformed its peers but also other high dividend plays. It is currently trading at 20x FY13 PE and 4.4% yield, and we think upside is limited at this point, given that it is trading close to historic high valuations. We do not expect strong earnings growth or any special dividends this year to justify any further re-rating. Hence, while we revise up our TP to S$4.80 to account for stronger sentiment and market yield compression, we cut our recommendation to HOLD.

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