Time to Fly, Time to BUY

Upgrade on relative valuations, attractive yields. We upgrade SIA Engineering (SIE) to a BUY based on undemanding valuations versus its peers like ST Engineering and HK Aircraft Engineering Co (HAECO) and attractive dividend yields of 5.1-5.6% p.a. Our target price of SGD4.95 implies 15% upside, backed by resilient earnings and strong cashflows. We continue to like the aviation engineering sector for its resilient growth prospects.

Under-appreciated within sector. Headlining our rationale for upgrading SIE is its relative value that has emerged within the aviation

maintenance, repair and overhaul (MRO) sector. SIE currently trades at a lower PER of 16x versus its peer average of 18.3x, while dividend yield of ~5.3% is a full percentage point higher than its peer average of 4.3%.

Sector outlook rosy, SIE well-poised to benefit. Industry forecasts for the aviation MRO sector are still showcasing steady growth especially in Asia. In addition, we favour SIE for its ability to continue growing its non-SIA customer base as an affirmation of its service quality. This allows SIE an enviable balance between a diversified customer base and a foundation to lean on: SIA’s MRO business.

Resilient business supports attractive yields. SIE’s record of profitability seems to corroborate the thesis of resilience within the aviation MRO sector. Even during times of global economic crises, SIE’s earnings remained stable and, together with strong cashflows, formed the basis of an increasing dividend payout trend.

Favoured play in aviation engineering: Upgrade to BUY. We now peg SIE’s valuation based on 18.3x FY3/14 PER, one standard deviation above its historical mean. Target price is accordingly raised to SGD4.95, implying 15% upside with an attractive 5.3% dividend yield adding to its investment case. SIE is now our pick in the aviation MRO sector based on its undemanding relative valuations. Upgrade to BUY.

Buy for the attractive yields!

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.

• Sales growth in line with expectations
  
• Higher contributions from Associates & JVs
  
• Still our top pick in the Transport sector
  
• Maintain Buy with unchanged target price of S$5.00
  

What is the news?

SIAEC reported a 6% improvement in sales and a marginal decline in profit for 1HFY13. SIAEC’s Rolls Royce JVs continue to report strong contributions. However, the other Associates reported lower contributions as compared to the same period last year. Interim dividend increased from 6.0 cents to 7.0 cents with management highlighting that this is “to achieve a better balance between the interim and final dividends”. Outlook statement remains cautious with expectations of sustained demand in the near term.

How do we view this?

The results were in line with our expectations. The FX variance that negatively affected profits by S$12.3mn was non-operating in nature and not a source of concern. We believe that SIAEC has the capacity to maintain their final dividend for the year and bring its full year distribution above last year’s 21cents.

Investment Actions?

SIAEC remains as our top pick in the sector, premised on its pure exposure to the aviation growth story in Asia. We expect the stock to yield more than 5% over the next few years. Maintain Buy.

Another steady quarter

• 2QFYMar13 net profit on track with our estimates
  
• Outlook for MRO demand remains fairly stable
  
• Higher interim DPS of 7Scts declared
  
• Maintain BUY for resilient earnings and >5% yield, TP is unchanged at S$4.40
  

Highlights

Headline net profit affected by forex losses. 2QFY13 net profit of S$67.1m came in line with our expectations, and 1HFY13 net profit accounts for more than 48% of our full year forecast. Net profit is down 6% y-o-y, but this is largely due to a couple of noncore items: i) forex loss of S$3.5m in 2Q13 compared to a forex gain of S$7.1m in 2Q12; and ii) S$3.1m tax writeback in 2Q12. Without the impact of these items, net profit would have been up about 15% y-o-y, on the back of a 4% growth in revenue to S$284m.

Core margins held up. Operating margins held largely steady on a sequential basis, at about 11.1%, which would have been higher at 12.2% if not for the forex losses. Contribution from JV/ associates was down about 4% y-o-y to S$39m, which is somewhat disappointing, but largely due to depreciation in the US$.

Our View

Steady outlook. Management continues to expect sustained demand for its core businesses in the near term, despite the ongoing challenges to the health of the airline industry. SIE should benefit from the growth in traffic in the resilient Asia-Pacific region. In 2Q13, the company won a S$166m MRO contract from Cebu Air, which further expands its fleet management business to cover 211 aircraft.

Recommendation

Dividend expectations intact, maintain BUY. SIE declared a higher interim DPS of 7Scts (compared to 6Scts interim DPS in 1HFY12) to achieve a better balance between interim and final dividends. Balance sheet continues to be robust and SIE closed the quarter with S$432m in net cash, higher compared to S$389m net cash at this point last year. While we lower our FY13/14F earnings estimates by about 1% each to account for forex losses, we believe SIE can continue to sustain total DPS of about 22Scts per year, which translates to a healthy yield of 5.3% at current prices, in addition to about 5% earnings growth. Hence, we retain our BUY call and TP of S$4.40.

Another steady quarter

• 2QFYMar13 net profit on track with our estimates
  
• Outlook for MRO demand remains fairly stable
  
• Higher interim DPS of 7Scts declared
  
• Maintain BUY for resilient earnings and >5% yield, TP is unchanged at S$4.40
  

Highlights

Headline net profit affected by forex losses. 2QFY13 net profit of S$67.1m came in line with our expectations, and 1HFY13 net profit accounts for more than 48% of our full year forecast. Net profit is down 6% y-o-y, but this is largely due to a couple of noncore items: i) forex loss of S$3.5m in 2Q13 compared to a forex gain of S$7.1m in 2Q12; and ii) S$3.1m tax writeback in 2Q12. Without the impact of these items, net profit would have been up about 15% y-o-y, on the back of a 4% growth in revenue to S$284m.

Core margins held up. Operating margins held largely steady on a sequential basis, at about 11.1%, which would have been higher at 12.2% if not for the forex losses. Contribution from JV/ associates was down about 4% y-o-y to S$39m, which is somewhat disappointing, but largely due to depreciation in the US$.

Our View

Steady outlook. Management continues to expect sustained demand for its core businesses in the near term, despite the ongoing challenges to the health of the airline industry. SIE should benefit from the growth in traffic in the resilient Asia-Pacific region. In 2Q13, the company won a S$166m MRO contract from Cebu Air, which further expands its fleet management business to cover 211 aircraft.

Recommendation

Dividend expectations intact, maintain BUY. SIE declared a higher interim DPS of 7Scts (compared to 6Scts interim DPS in 1HFY12) to achieve a better balance between interim and final dividends. Balance sheet continues to be robust and SIE closed the quarter with S$432m in net cash, higher compared to S$389m net cash at this point last year. While we lower our FY13/14F earnings estimates by about 1% each to account for forex losses, we believe SIE can continue to sustain total DPS of about 22Scts per year, which translates to a healthy yield of 5.3% at current prices, in addition to about 5% earnings growth. Hence, we retain our BUY call and TP of S$4.40.

1HFY13 RESULTS IN LINE

• 1HFY13 EPS is 49% of our FY13 estimate
  
• S$3.1m write-back of tax provision
  
• Stable outlook in near term
  

1HFY13 financials in line with expectations

SIA Engineering Co Ltd’s (SIAEC) 1HFY13 financial results were generally in line with our expectations. Basic EPS for 1HFY13 was 12.47 S cents, 49% of our FY13F estimate of 25.6 S cents. Revenue climbed by 6.4% YoY to S$585m, attributable mainly to revenue from materials, fleet management program and line maintenance. Operating margin declined 1.4ppt from 1HFY12 to 11.1% in 1HFY13 because of higher material cost, exchange loss, and increase in subcontract and staff costs. 1HFY13 recorded an exchange loss of S$3.7m versus an exchange gain of S$8.6m a year ago.

Increase in contribution from associates and JVs

Share of profits from associated and joint venture companies increased 1.4% YoY to S$78.8m, accounting for 51% of SIAEC’s pretax profits. 1HFY13 PATMI declined 1.5% YoY to S$137.2m chiefly because profit for the period a year ago included a S$3.1m write-back of tax provision. To achieve a better balance between the interim and final dividends, SIAEC has declared an interim dividend of 7 S cents, an increase of 1 S cents per share over last year.

Sustained demand in near term

Management expects that that demand for the company’s core businesses will be sustained in the near term. SIAEC acknowledges that the operating environment poses challenges as the global economy continues to affect the aviation industry. Management will continue to be vigilant about cost control and productivity improvements.

Maintain HOLD

Rolling our valuation forward, we use 3QFY13-2QFY14 basic EPS of 26.2 S cents and a P/E multiple of 15.8x (half a standard deviation higher than the 4-year average of 14.6x). We increase our fair value estimate from S$4.04 to S$4.14 and maintain our HOLD rating on SIAEC.