No let up in steam

• 1Q13 net profits of S$70m in line with estimates

• Aviation industry still growing decently with lower oil prices offering more relief; SIE’s growth unimpeded

• Dividend yield in excess of 5% largely secured

• Maintain BUY with higher TP of S$4.40

Highlights

Good start to the year. 1Q-FY13 results were in line with our expectations, with SIE reporting S$70.1m in net profits, up 3% yo-y and 6% q-o-q, on the back of 8% y-o-y growth in revenues. Revenue growth continues to be driven mainly by the increasing fleet size under SIE’s Fleet Management Programme (FMP). Given the relatively lower margins in the FMP segment (more material content), 1Q13 operating margins were 1ppt lower y-o-y at 11.4%, but this is still an improvement over the levels seen in the last two quarters, owing to lower sub-contract costs incurred during the quarter. Contribution from associates and JVs remained stable at S$40m, accounting for more than 50% of group PBT.

Our View

Stable outlook. With oil prices currently subsiding from the highs in early 2012, this will provide some relief to the airline industry in 2012. Load factors in the region continue to be stable and aircraft movements at Singapore’s Changi Airport continue to hit new records (10% growth during 1H-CY12), driven mainly by traffic from other Asian countries and the Middle East. Thus, with SIE’s key presence in the Asia-Pacific and the Gulf (Bahrain), we believe demand for the group’s core MRO businesses will remain stable in the near term. We expect SIE to record a steady 5 to 6% earnings growth in FY13/14. Note that SIE was recently been awarded a five-year fleet management contract worth S$166m by Cebu Air to maintain its growing fleet of A320 aircrafts.

Recommendation

Maintain BUY, likely yield of close to 5.5%. With its steady earnings outlook, strong balance sheet and healthy yield prospects, SIE remains a safe haven stock with limited possibility of earnings shocks. The group had ended the quarter with about S$574m in net cash, and we remain comfortable with our 22Scts dividend projection for FY13, which implies an 85% payout ratio. Hence, we maintain our BUY call on the stock. Our TP – based on the blended valuation methodology – is revised up to S$4.40 as we lower our WACC assumption from 7.8% to 7.4% in our DCF calculations to reflect growing confidence in the steady nature of SIE’s earnings and cash flow.

No let up in steam

• 1Q13 net profits of S$70m in line with estimates

• Aviation industry still growing decently with lower oil prices offering more relief; SIE’s growth unimpeded

• Dividend yield in excess of 5% largely secured

• Maintain BUY with higher TP of S$4.40

Highlights

Good start to the year. 1Q-FY13 results were in line with our expectations, with SIE reporting S$70.1m in net profits, up 3% yo-y and 6% q-o-q, on the back of 8% y-o-y growth in revenues. Revenue growth continues to be driven mainly by the increasing fleet size under SIE’s Fleet Management Programme (FMP). Given the relatively lower margins in the FMP segment (more material content), 1Q13 operating margins were 1ppt lower y-o-y at 11.4%, but this is still an improvement over the levels seen in the last two quarters, owing to lower sub-contract costs incurred during the quarter. Contribution from associates and JVs remained stable at S$40m, accounting for more than 50% of group PBT.

Our View

Stable outlook. With oil prices currently subsiding from the highs in early 2012, this will provide some relief to the airline industry in 2012. Load factors in the region continue to be stable and aircraft movements at Singapore’s Changi Airport continue to hit new records (10% growth during 1H-CY12), driven mainly by traffic from other Asian countries and the Middle East. Thus, with SIE’s key presence in the Asia-Pacific and the Gulf (Bahrain), we believe demand for the group’s core MRO businesses will remain stable in the near term. We expect SIE to record a steady 5 to 6% earnings growth in FY13/14. Note that SIE was recently been awarded a five-year fleet management contract worth S$166m by Cebu Air to maintain its growing fleet of A320 aircrafts.

Recommendation

Maintain BUY, likely yield of close to 5.5%. With its steady earnings outlook, strong balance sheet and healthy yield prospects, SIE remains a safe haven stock with limited possibility of earnings shocks. The group had ended the quarter with about S$574m in net cash, and we remain comfortable with our 22Scts dividend projection for FY13, which implies an 85% payout ratio. Hence, we maintain our BUY call on the stock. Our TP – based on the blended valuation methodology – is revised up to S$4.40 as we lower our WACC assumption from 7.8% to 7.4% in our DCF calculations to reflect growing confidence in the steady nature of SIE’s earnings and cash flow.

Holding Up Well with Stable Earnings

1QFY3/13 results in line. SIA Engineering (SIE) reported 1QFY3/13 NPATMI of SGD 70.1 m, making up 25% of our full year FY3/13 forecast. Although revenue improved 8.2% YoY to SGD 300.5 m, cost pressures contributed to a 0.9% drop in operating profit to SGD 34.4 m. JVs and Associates continued their significant contribution (~51% of PBT) to SIE’s bottomline, posting a 7.5% increase YoY.

Cost pressures and Margin concerns. In our previous note, we had highlighted our concerns of margin erosion and a delayed recovery in the aviation sector as key risks for SIE. These risk factors are still largely prevalent, with higher subcontract, staff and material costs being cited by SIE as main contributors to its 9.6% YoY increase in operating expenditure for 1QFY3/13.

Supported by positive MRO macro outlook. Amidst a possible delay in an aviation sector-wide recovery, the MRO segment remains relatively resilient, with a ~4% CAGR growth forecasted globally for the next 5 years. 1H2012 aircraft movement at Changi Airport has also maintained strong growth of 10.2% YoY, offering further growth support for SIE on a domestic front. SIE’s strong balance sheet with its net cash position of SGD 572 m and healthy cash-generating business (1QFY3/13 net cash inflow of +SGD 75.9 m) should continue to support a steady, growing dividend payout.

Within expectations, maintain HOLD. With SIE’s results in line with ours and consensus forecasts, we maintain our HOLD call, pegged to SIE’s historical PER average of 15.4x FY3/13 earnings. Existing investors keen on pure aviation engineering exposure can continue to enjoy SIE’s dividend yields in the 5-6% range. However, we reiterate our preference for ST Engineering in the aviation engineering sector, for its defense-backed contracts and strong orderbook which provides better earnings visibility.

Holding Up Well with Stable Earnings

1QFY3/13 results in line. SIA Engineering (SIE) reported 1QFY3/13 NPATMI of SGD 70.1 m, making up 25% of our full year FY3/13 forecast. Although revenue improved 8.2% YoY to SGD 300.5 m, cost pressures contributed to a 0.9% drop in operating profit to SGD 34.4 m. JVs and Associates continued their significant contribution (~51% of PBT) to SIE’s bottomline, posting a 7.5% increase YoY.

Cost pressures and Margin concerns. In our previous note, we had highlighted our concerns of margin erosion and a delayed recovery in the aviation sector as key risks for SIE. These risk factors are still largely prevalent, with higher subcontract, staff and material costs being cited by SIE as main contributors to its 9.6% YoY increase in operating expenditure for 1QFY3/13.

Supported by positive MRO macro outlook. Amidst a possible delay in an aviation sector-wide recovery, the MRO segment remains relatively resilient, with a ~4% CAGR growth forecasted globally for the next 5 years. 1H2012 aircraft movement at Changi Airport has also maintained strong growth of 10.2% YoY, offering further growth support for SIE on a domestic front. SIE’s strong balance sheet with its net cash position of SGD 572 m and healthy cash-generating business (1QFY3/13 net cash inflow of +SGD 75.9 m) should continue to support a steady, growing dividend payout.

Within expectations, maintain HOLD. With SIE’s results in line with ours and consensus forecasts, we maintain our HOLD call, pegged to SIE’s historical PER average of 15.4x FY3/13 earnings. Existing investors keen on pure aviation engineering exposure can continue to enjoy SIE’s dividend yields in the 5-6% range. However, we reiterate our preference for ST Engineering in the aviation engineering sector, for its defense-backed contracts and strong orderbook which provides better earnings visibility.

Another Steady Set of Results

Company Overview

SIA Engineering Company (SIAEC) is a maintenance, repair & overhaul (MRO) company with a dominant market share in Changi Airport's Line Maintenance business. The Group also has significant stakes in joint ventures that contribute approximately half of the Group's profits.

• Higher business volume led to increase in sales

• Record contributions from its Rolls Royce JVs

• Change in policy reduced depreciation exp. by S$0.8mn

• Maintain Buy with unchanged target price of S$5.00

What is the news?

SIAEC reported a steady set of results with net profit increasing by 2.9%y-y. Profitability at the company level remains poor as margins declined 1.1ppt due to higher labour and subcontracting expenses. Contributions from Associates declined to S$14.8mn in the quarter. SIAEC's Engine Joint Ventures with Rolls Royce (RR) reported the strongest set of results in its history. Depreciation expenses were lower due to a change in accounting policy that reduced expenses by S$0.8mn in the quarter.

How do we view this?

The results were largely in line with our expectations. Strong earnings momentum from the JVs offset the lower contributions from its Associates, in line with our expectations of strong performance at SAESL. We tweaked our estimates to reduce our depreciation expense estimates, lowered contributions from Associates and increased contributions from Joint Ventures.

Investment Actions?

SIAEC remains as our top pick in the sector, premised on its pure exposure to the aviation growth story in Asia. Despite a strong rally since the start of the year, we still expect the stock to sustain dividend yields of >5% over the next few years. Maintain Buy with TP of S$5.00.