SIAEC – MayBank Kim Eng

Worth More Than The SOTP Now

Beneficiary of SIA’s constant re-jig of business models. SIA had been trying out various means to restructure its business model over the years, which includes the introduction of Low Cost Carrier units (Scoot & Tiger Airways), aircraft reconfigurations to fit business conditions and orders for new aircraft. In order to cater to growing demand for regional air travel, SIA also recently placed a record aircraft order for SilkAir. Collectively, SIA, SilkAir and Scoot have 143 aircraft on order as compared to their current combined fleet of 127 aircraft, which is a reflection of the future growth in MRO work for SIAEC. On top of this, we believe that SIA Engineering Company (SIAEC) offers excellent exposure to the structural growth in air traffic in the Asia-Pacific region, which would account for 35% of global aircraft deliveries over the next 20yrs. 65% of the group’s pro-forma revenue comes from non-SIA customers.

New angle – unlocking latent value in the JVs. We believe that there is latent value in the JVs held by SIAEC, which could be unlocked with a separate listing. In particular, we are bullish on the outlook for one of its JVs with Rolls Royce, SAESL, which specializes in the repair and overhaul of Trent engines. Our bullish view on the prospects for the JV is backed by the 2,400 Trent engines on Rolls Royce’s order book (vs the 2,200 Trent engines currently in service). For the aircraft on SIA’s order book, 5 A380s (Trent 900), 40 A350s (Trent XWB) and 14 A330s (Trent 700) will be utilizing the Trent series of engines. We believe that SAESL’s future workload could increase even further, if Scoot decides on using the Trent 1000 engines for its new fleet of 20 B787s.

Upgrade to Buy, TP of SGD6.16 based on SOTP. Given the diversity of the underlying businesses, we believe that the stock is best valued using a sum-of-the-parts (SOTP) methodology. While P/E multiples appear rich relative to its historical trading range, we argue that there is hidden value within its business units that are not fully reflected with a P/E valuation method. Our SOTP does not take into account potential upside from a separate spin-off of its JVs. Furthermore, in the current low interest rate environment, we expect stock interest to remain high with its strong track record of dividend distributions. On our forecast, SIAEC offers potential 3yr yield of 4.6-5.0%.

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