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.

SIA Engg Q4 earnings rise 8.9%

SIA Engineering Co (SIAEC) posted a net profit of $66.3 million for the fourth quarter ended March 31, 2012, an 8.9 per cent rise from $60.9 million for the previous corresponding quarter on the back of higher profits from associated and joint venture companies.

Earnings per share came to 6.04 cents, up from 5.59 cents previously. Operating profit totalled $32.5 million, a 6.2 per cent rise from $30.6 a year ago on higher revenue.

The group, which posted its results late yesterday, said that revenue for the three months jumped 16.4 per cent to $316.5 million.

On its outlook, SIAEC noted that uncertainties in the world's major economies and oil price volatility continue to impact the aviation industry.

SIA Engg Q4 earnings rise 8.9%

SIA Engineering Co (SIAEC) posted a net profit of $66.3 million for the fourth quarter ended March 31, 2012, an 8.9 per cent rise from $60.9 million for the previous corresponding quarter on the back of higher profits from associated and joint venture companies.

Earnings per share came to 6.04 cents, up from 5.59 cents previously. Operating profit totalled $32.5 million, a 6.2 per cent rise from $30.6 a year ago on higher revenue.

The group, which posted its results late yesterday, said that revenue for the three months jumped 16.4 per cent to $316.5 million.

On its outlook, SIAEC noted that uncertainties in the world's major economies and oil price volatility continue to impact the aviation industry.

Steady take-off

SIA Engineering has all the ingredients of a quality stock: stable earnings growth, high ROEs, net cash, attractive dividend yields and undemanding valuations against peers.

We peg a higher P/E of 15x (5-year mean) in our blended valuation (previously 10x on recession trading band) following a more positive MRO outlook. We refine our EPS as we update some assumptions. Maintain Outperform with catalysts anticipated from strong earnings growth.

More heavy checks

We believe SIA’s workload alone can sustain utilisation rates at all of SIE’s six hangars. About 41 of SIA’s aircraft are due for D checks in 2012-13, in our estimation. These would comprise the first “D” checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second “D” checks (after 10 years of flying). Management expects the hangars to be at least 70% utilised in the next five years, backed by long-term contracts and current order book.

Bullish on MRO

We are bullish on the MRO industry. According to the latest statistics released by IATA, asset utilisation for airlines in the passenger market had improved in Jan, even after adjusting for high Chinese New Year load factors. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilization rises, we expect demand for heavy maintenance services to rise.

Earnings recovery unappreciated

SIE has outperformed the market by about 11% since our upgrade in Feb 12. We see room for further upside given the steady growth of its MRO usiness. As risks of an economic downturn dissipate, we see a less likelihood of capacity cuts by airlines. In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7% through 2014 as SIE is trading at its Mar 10 valuations when its earnings dipped 10%. We prefer SIE to ST Engineering for its more attractive valuations (14x CY13 P/E vs. 17x CY13 P/E).

Steady take-off

SIA Engineering has all the ingredients of a quality stock: stable earnings growth, high ROEs, net cash, attractive dividend yields and undemanding valuations against peers.

We peg a higher P/E of 15x (5-year mean) in our blended valuation (previously 10x on recession trading band) following a more positive MRO outlook. We refine our EPS as we update some assumptions. Maintain Outperform with catalysts anticipated from strong earnings growth.

More heavy checks

We believe SIA’s workload alone can sustain utilisation rates at all of SIE’s six hangars. About 41 of SIA’s aircraft are due for D checks in 2012-13, in our estimation. These would comprise the first “D” checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second “D” checks (after 10 years of flying). Management expects the hangars to be at least 70% utilised in the next five years, backed by long-term contracts and current order book.

Bullish on MRO

We are bullish on the MRO industry. According to the latest statistics released by IATA, asset utilisation for airlines in the passenger market had improved in Jan, even after adjusting for high Chinese New Year load factors. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilization rises, we expect demand for heavy maintenance services to rise.

Earnings recovery unappreciated

SIE has outperformed the market by about 11% since our upgrade in Feb 12. We see room for further upside given the steady growth of its MRO usiness. As risks of an economic downturn dissipate, we see a less likelihood of capacity cuts by airlines. In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7% through 2014 as SIE is trading at its Mar 10 valuations when its earnings dipped 10%. We prefer SIE to ST Engineering for its more attractive valuations (14x CY13 P/E vs. 17x CY13 P/E).