SIAEC – DBSV

Mixed bag

  • 1QFYMar14 net profit of S$69m largely in line
  • Weaker core operating margins offset by stronger contributions from JV/ associates
  • Trading cum dividend (FY13 final DPS of 15Scts) till 25 July; lacks major catalysts for any further re-rating
  • Maintain HOLD while revising our TP higher to S$5.10, as we benchmark valuations to listed peers

Highlights

Weaker core operating margins. 1QFY14 net profit of S$69m (up 5% q-o-q, down 2% y-o-y) came in largely within expectations, and made up more than 24% of our full-year FY14 earnings estimates. Revenue of S$289.4m showed similar flattish trends – lower 4% y-oy on lower material and fleet management revenue – but core operating margins dipped during the quarter to 9.6%, down from 10.9% in 4Q13 and 11.4% in 1Q13, likely on the back of higher subcontract costs.

Offset by strong performance at JV/assoc level. The performance of the Group’s JV/ associates – largely driven by its engine shops like SAESL and Eagle Asia – picked up strongly in 1Q14, likely helped by a stronger USD as well. Contributions from JV/ associates improved 14% y-o-y to S$45.6m, accounting for close to 58% of Group PBT during the quarter.

Our View

Near term outlook steady but unexciting. We expect sustained demand for the Group’s core MRO businesses in the near term, despite the uncertain macro environment. SIE should continue to benefit from growth in air traffic in the Asia-Pacific region, supporting the relative resilience of Asian carriers. Growth will be driven by its cluster of strategic partnerships that SIE has established in various pockets of the MRO value chain over recent years, but the ramp up will be gradual, as evidenced by the flattish growth in FY13.

Recommendation

Trading at close to +2 S.D. valuations, maintain HOLD. Cash generation continued to be robust in 1Q14 and net cash is now close to S$620m, supporting the Group’s ability to pay steady dividends. However, further growth in dividends is unlikely in FY14 and current valuations look rich at 20x FY14 PE. Given the lack of significant near term catalysts, we maintain HOLD at a revised TP of S$5.10 (adjusting for higher relative valuation pegs).

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