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.

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.

Resilience pays

• 4Q and FY12 results in line with expectations; higher revenues offset by lower operating margins

• Final dividend slightly better than expected at 15Scts

• No major signs of stress in the aviation market and outlook for MRO services remains steady,

• Maintain BUY with revised TP of S$4.30

Highlights

Another strong quarter. 4QFYMar12 results were in line with our estimates, as SIE reported S$269m in net profit for FY12, up 4% y-o-y, on the back of 6% rise in revenues. While 4Q was another record quarter for revenues, operating margins were subdued at 10.3%, due to the higher proportion of revenue from fleet management programme and cabin interior reconfiguration projects, which involve higher overheads and subcontract costs. Despite the weak US$, contribution from associates and JVs continued to recover– up almost 9% y-o-y to S$157m – and represented 52% of SIE’s PBT.

Dividend adds cheer. The company ended the year with close to S$500m net cash and declared a final DPS of 15Scts for FY12, in addition to the interim DPS of 6Scts paid earlier. This is higher than the final DPS of 14Scts declared in FY11 (though there was a special payout of 10Scts in FY11), and represents a healthy payout ratio of about 85%.

Our View

Stable outlook. The risks of slower global economic growth and high fuel costs continue to weigh on the airline industry in 2012. However, we do not see any alarming signs yet and most carriers in the Asia-Pacific region continue to add capacity. Passenger and aircraft movements at Singapore’s Changi Airport continue to hit new records (13% y-o-y growth during 1Q-CY12) and SIE’s management believes demand for its core businesses will remain stable in the near term. We expect SIE to record steady 5-6% growth in FY13/14F.

Recommendation

Maintain BUY with fairly secure yield of 5.5%. With its steady earnings outlook, strong balance sheet and healthy dividend prospects, SIE has outperformed the choppy market in recent months. Given the prevailing economic uncertainties, high oil prices and limited signs of growth acceleration in the US and EU, we believe SIE will continue to generate interest as a safe haven stock with limited possibility of earnings shocks. Hence, we maintain our BUY call on the stock. Our TP is rerevised up to S$4.30 as we roll over our valuations to FY13.

Resilience pays

• 4Q and FY12 results in line with expectations; higher revenues offset by lower operating margins

• Final dividend slightly better than expected at 15Scts

• No major signs of stress in the aviation market and outlook for MRO services remains steady,

• Maintain BUY with revised TP of S$4.30

Highlights

Another strong quarter. 4QFYMar12 results were in line with our estimates, as SIE reported S$269m in net profit for FY12, up 4% y-o-y, on the back of 6% rise in revenues. While 4Q was another record quarter for revenues, operating margins were subdued at 10.3%, due to the higher proportion of revenue from fleet management programme and cabin interior reconfiguration projects, which involve higher overheads and subcontract costs. Despite the weak US$, contribution from associates and JVs continued to recover– up almost 9% y-o-y to S$157m – and represented 52% of SIE’s PBT.

Dividend adds cheer. The company ended the year with close to S$500m net cash and declared a final DPS of 15Scts for FY12, in addition to the interim DPS of 6Scts paid earlier. This is higher than the final DPS of 14Scts declared in FY11 (though there was a special payout of 10Scts in FY11), and represents a healthy payout ratio of about 85%.

Our View

Stable outlook. The risks of slower global economic growth and high fuel costs continue to weigh on the airline industry in 2012. However, we do not see any alarming signs yet and most carriers in the Asia-Pacific region continue to add capacity. Passenger and aircraft movements at Singapore’s Changi Airport continue to hit new records (13% y-o-y growth during 1Q-CY12) and SIE’s management believes demand for its core businesses will remain stable in the near term. We expect SIE to record steady 5-6% growth in FY13/14F.

Recommendation

Maintain BUY with fairly secure yield of 5.5%. With its steady earnings outlook, strong balance sheet and healthy dividend prospects, SIE has outperformed the choppy market in recent months. Given the prevailing economic uncertainties, high oil prices and limited signs of growth acceleration in the US and EU, we believe SIE will continue to generate interest as a safe haven stock with limited possibility of earnings shocks. Hence, we maintain our BUY call on the stock. Our TP is rerevised up to S$4.30 as we roll over our valuations to FY13.

Unwavering confidence

We like SIE’s net-cash balance sheet and attractive dividend yieldsof about 6%. Despite a choppy global outlook, we continue to expect decent earnings growth backed by strong demand for MRO.

FY12 net profit is in line at 99% of our forecast and consensus. SIE declared a final DPS of 15 Scts, bringing FY12 DPS to 21 Scts for an 86% payout, as expected. We adjust our EPS by -0.4% for housekeeping matters and maintain Outperform and target price (blended P/E and DCF).

More work in the hangar

We expect average earnings growth of 6% for FY13-15 from an expanding fleet management programme and fleet size as well as strong demand for airframe MRO. We believe hangars are booked out with good visibility and at least 70% utilisation in the next five years.

4Q12 revenue was another record, at S$316.5m (+16% yoy), thanks to a bigger workload from fleet management, MRO and a cabin interior reconfiguration project for four B777-300 aircraft. EBITDA margins dipped to 13.5% from 14.8% in 4Q12, we believe due to higher outsourcing costs for fleet management.

JVs and associates back to pre-crisis levels

Share of profits from associates and JVs grew by about 9 % yoy to S$157m in FY12, after being hit in 2010-11. We expect 10% yoy growth in FY13-15, backed by stronger business volumes, reflecting the recovery in its engine and component business. Associates and JVs should contribute about 60% to SIE’s net profit.

Strong cash and inexpensive

SIE is trading at about 14.7x CY13 P/E, slightly below its 5-year average of 15x. We believe the market has not priced in its earnings growth through 2015 as it is now trading at its Mar 10 valuations when its earnings slipped 10%. SIE also boasts a strong balance sheet with net cash of S$496m.