SIAEC – MayBank Kim Eng

Customers’ Fleet Development a Positive For JV

60% more aircraft on order to use Trent engines at SIA group. SIA recently announced new aircraft orders and engine selections. Our analysis of the updated fleet and orders for the SIA group shows that there are 60% more aircraft on order that would be utilising the Trent series of engines, implying a huge amount of maintenance work in future for SAESL, a key JV of SIAEC.

Not just about SIA. We would like to debunk a common misconception that SIAEC only benefits from maintenance work for SIA. While SIAEC still derives more than 60% of sales from SIA, non-SIA customers drive more than 70% of sales at its associates and JVs.

Customers’ fleet development bodes well for SAESL. The company in focus for this report, SAESL, services 13 other airline customers outside of the SIA group. Our review of the fleet development for SAESL’s customers points to an increasingly positive outlook. In addition to an existing fleet of 238 Trent-powered aircraft, we estimate that these non-SIA clients have a combined order of 277 aircraft that would be utilising Trent engines in future. In the near term, we expect SAESL to benefit from the fleet development at Air Asia X, MAS, Thai, Garuda, Air NZ and Virgin Atlantic. Aircraft orders at Qatar, Emirates, Etihad and Yemenia would provide longer-term upside.

We expect capacity expansion to keep pace with growing demand. With the positive demand outlook, we believe that SAESL would need to increase its capacity beyond the current 250 engine repairs a year, to meet the growing volume of maintenance work.

Maintain BUY, TP: SGD6.16. We reiterate our positive view on SIA Engineering (SIAEC) and believe that it is time for the market to look deeper and appreciate the hidden value within SAESL, a top-notch franchise in the group. While the market tends to value SIAEC on a PER basis, we argue that SIAEC is not a stock that trades on earnings, but rather, on cashflow. We forecast FCF of SGD224-270m for FY14-16E, which translates to an FCF yield of 4.5-5.4%.

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