Emerging value

SIA Engineering (SIE) is likely to benefit from stronger regional travel, spurred by weak currencies. The share price has pulled back by 11% from its peak in May, making it more attractive. We upgrade our rating to Outperform from neutral.

We roll over our valuations to CY15 and upgrade our target price to S$5.20, still based on blended P/E and DCF. SIE is one of the top 10 non-REIT, high-yield Singaporean plays that are in a net cash position and has sustainable earnings growth prospects. We raise our EPS by 2% in FY16 based on higher growth in the line maintenance business. The catalysts are better-than-expected earnings and dividends.

Weak currencies boost regional travel

We expect SIE to benefit from the increase in regional air travel, which will continue on the back of weak currencies. Passenger movements between Singapore and Bali-Denpasar, Sydney, Tokyo (among Changi’s top 10 cities) registered double-digit increases in Jul 2013, in line with the weakened currencies of these countries.

Flights handled in Changi can only go up

The number of flights handled in Changi rose by an encouraging 7% yoy to 934 flights per day in Jul 2013 after a tepid average monthly increase of 5% yoy since Jun 2012. The Civil Aviation Authority of Singapore (CAAS) estimates that Changi Airport will have the capacity to handle up to 430,000 flights p.a. (1,178 flights per day) in 2018, based on 5% p.a. flight volume growth. This suggests that there is 26% upside from the existing base volume and that SIE’s line maintenance business can only go up. We marginally increase our line maintenance sales growth estimates in FY15-16 to 6% from 4%.

Attractive dividend yields

SIE’s net cash at end-1Q14 stood at S$622m, which is a level that could lead to special dividends, as in FY06 and FY11 when net cash exceeded S$500m. However, we have conservatively assumed 90% dividend payout ratio and net dividend yield of 5% in FY14. If there are no major M&As by end-FY14 and net cash still hovers above S$500m, we believe that SIE will maintain its good track record of rewarding shareholders via special dividends. The average dividend payout ratio in FY06 and FY11 was 130%, or c.S$0.33/share, resulting in a dividend yield of 7%.

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