Category: SIA Engg
Aviation Services
Qantas-Emirates tie-up
Sector Overview
The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS).
- Qantas is shifting its European hub from Singapore to Dubai
- A mix bag for SIA
- Mildly negative in the near term for SIAEC & SATS
- We caution against overreacting to the news
What is the news?
Qantas announced a strategic 10yrs partnership with Emirates that would see the Australian carrier shift its European hub from Singapore to Dubai. Consequently, Qantas would terminate their 17yrs long business alliance with British Airways. Qantas would also withdraw its Singapore to Frankfurt route that had been underperforming.
A mix bag for SIA
Strategically, this implies that competition for traffic between Europe and Australia would be stiffer with the new alliance between two of its major competitors. However, we opine that it also implies less competition for European customers travelling to Singapore. Hence, we see this development as a mix bag for SIA.
Minimal near term impact for SATS & SIAEC
This move by Qantas has tactical and strategic implications for the aviation service providers, SIAEC & SATS, under our coverage. We see this as mildly negative for the aviation service providers as the termination of flight services would result in lower work volume for both companies. However, we estimate that the shifting of flights to Dubai would account for less than 2% of flight traffic at Changi Airport and caution against overreacting to the news.
The Qantas Group is the 2nd largest user of Changi Airport, after the SIA Group, but only after including significant traffic from Jetstar Asia. We believe that Asia remains an important market for the Qantas Group and would continue to be an important part of their growth strategy. In fact, Alan Joyce, Qantas’s CEO, mentioned “Qantas will increase dedicated capacity to Singapore and re-time flights to Singapore and Hong Kong to enable many more ‘same day’ connections across Asia.” Bloomberg news subsequently reported this capacity growth to Changi Airport at 25%. Hence, this expected increase in traffic growth at Changi could actually be positive for the aviation service providers!
Strategic implications for SIAEC & SATS
There are also concerns over a potential loss of contracts with Qantas, as the second largest service provider at Changi Airport, dnata Singapore, is part of the Emirates Group. We acknowledge this as a longer term risk, but opine that near term effects are limited. In particular, we see little risk in the near term for SATS as the company had recently renewed their contract (inflight catering, laundry services, ground and cargo handling) with Qantas in 1QFY13. Contract information for SIAEC is not available.
SIAEC – DBSV
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.
SIAEC – DBSV
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.
SIAEC – Kim Eng
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.
SIAEC – Kim Eng
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.