Stable outlook

• FY14 results in-line
  
• Modest gain from regional airlines’ capacity growth
  
• Maintain HOLD
  

FY14 results within expectations

SIA Engineering Company’s (SIAEC) FY14 results were within expectations. FY14 revenue increased 2.7% to S$1.18b, forming 101.4% of our forecast. However, lower margins resulted in PATMI declining 1.6% to S$266m, making up 99.1% of our forecast. The S$44.0m increase in expenditure (+4.3%) came mainly from higher staff costs, sub-contracting and material costs.

This is partly compensated by associates’ and JVs’ share of profits increasing steadily by 8.3% to S$162.6m, representing 61% of the SIAEC’s net profit. The main contributors were the engine repair and overhaul centres which accounted for S$125.0m. A final ordinary and special dividend of 13 S-cents and 5 S-cents respectively were recommended, bringing full-year dividend to 25 S-cents.

Modest upside from high capacity growth in Asian airlines

Though Asian airlines are adding capacity aggressively, bulk of the capacity growth is in the low cost carrier (LCC) segment. According to CAPA, APAC LCCs aircraft order book is 2.4x of current fleet as of Dec-13. As LCCs typically use older aircraft models with minimal cabin works, there is less earnings from MRO per aircraft. The tight operating budgets of LCCs also mean they are more likely to choose other lower-cost sites nearby for MRO even if the turnaround time is higher. Hence, we see modest upside and think SIAEC’s outlook will continue to be stable.

Philippines’ third hangar to start operations in Jun-14

Management guided that the third hangar at Clark base (Philippines) is expected to come on-stream in Jun-14. With this new hangar, Clark base’s capacity is expected to double. As the two existing Clark base hangars are already fully utilised, we expect the third hangar to start contributing to earnings in 2HFY15.

Maintain HOLD

Incorporating the latest results, we maintain a HOLD rating on SIAEC but raise our FV slightly from S$4.77 to S$4.83 based on 19.0x FY15 EPS of 25.4 S-cents (previous: 25.1 S-cents). Assuming a 90% payout ratio (vs. three-year historical average of 93.5%), we expect FY15F dividend yield to be reasonably attractive at 4.7%.

Stable outlook

• FY14 results in-line
  
• Modest gain from regional airlines’ capacity growth
  
• Maintain HOLD
  

FY14 results within expectations

SIA Engineering Company’s (SIAEC) FY14 results were within expectations. FY14 revenue increased 2.7% to S$1.18b, forming 101.4% of our forecast. However, lower margins resulted in PATMI declining 1.6% to S$266m, making up 99.1% of our forecast. The S$44.0m increase in expenditure (+4.3%) came mainly from higher staff costs, sub-contracting and material costs.

This is partly compensated by associates’ and JVs’ share of profits increasing steadily by 8.3% to S$162.6m, representing 61% of the SIAEC’s net profit. The main contributors were the engine repair and overhaul centres which accounted for S$125.0m. A final ordinary and special dividend of 13 S-cents and 5 S-cents respectively were recommended, bringing full-year dividend to 25 S-cents.

Modest upside from high capacity growth in Asian airlines

Though Asian airlines are adding capacity aggressively, bulk of the capacity growth is in the low cost carrier (LCC) segment. According to CAPA, APAC LCCs aircraft order book is 2.4x of current fleet as of Dec-13. As LCCs typically use older aircraft models with minimal cabin works, there is less earnings from MRO per aircraft. The tight operating budgets of LCCs also mean they are more likely to choose other lower-cost sites nearby for MRO even if the turnaround time is higher. Hence, we see modest upside and think SIAEC’s outlook will continue to be stable.

Philippines’ third hangar to start operations in Jun-14

Management guided that the third hangar at Clark base (Philippines) is expected to come on-stream in Jun-14. With this new hangar, Clark base’s capacity is expected to double. As the two existing Clark base hangars are already fully utilised, we expect the third hangar to start contributing to earnings in 2HFY15.

Maintain HOLD

Incorporating the latest results, we maintain a HOLD rating on SIAEC but raise our FV slightly from S$4.77 to S$4.83 based on 19.0x FY15 EPS of 25.4 S-cents (previous: 25.1 S-cents). Assuming a 90% payout ratio (vs. three-year historical average of 93.5%), we expect FY15F dividend yield to be reasonably attractive at 4.7%.

Special dividend surprise

• 4QFY3/14 net profit of SGD65.2m (-1.1% YoY) is marginally below expectations on weak JV contributions.
  
• Special DPS of 5 SGD cts brings full-year payout to 25 SGD cts, up 14% YoY and translates to attractive 5.2% yield.
  
• FY3/15E-17E forecasts revised by -7%/-1%/+7% on delayed ramp-up in workload. Maintain BUY and TP of SGD5.75.
  

What’s New

SIA Engineering (SIAEC) reported 4QFY3/14 net profit of SGD65.2m (-1.1% YoY), marginally below our expectations. This was due to weak contributions from its Rolls-Royce JVs which we had anticipated (note), but the sharp magnitude of decline still took us by surprise. On a more positive note, full-year DPS payout rose 14% YoY to 25 SGD cts, including a special DPS of 5 SGD cts. This translates to a solid dividend yield of 5.2%, which compares favourably against its peers. Management expects group performance to remain stable in the year ahead.

What’s Our View

While weakness may persist for SIAEC’s Rolls-Royce JVs in the near term, we reiterate that longer-term trends remain positive as the global Trent engine fleet is expected to double over the next five years. Management is unfazed by the reduction in workload due to the improved reliability of Trent 700 engines, confident that maintenance work is merely delayed. The opening of its third hangar in the Philippines next month means contribution from the airframe maintenance business should improve in 2HFY3/15E. We tweak our FY3/15E/16E/17E EPS forecasts by -7%/-1%/+7%, mainly to reflect the delayed ramp-up in workload for its Trent engines. Our TP of SGD5.75 remains intact, based on a higher target multiple of 23x FY3/15E (previously 21x) to account for stronger EPS growth over a three-year horizon. As the best proxy to the structural air traffic growth in the region, SIAEC is our preferred exposure in the Singapore Transportation space. BUY reiterated.

Special dividend surprise

• 4QFY3/14 net profit of SGD65.2m (-1.1% YoY) is marginally below expectations on weak JV contributions.
  
• Special DPS of 5 SGD cts brings full-year payout to 25 SGD cts, up 14% YoY and translates to attractive 5.2% yield.
  
• FY3/15E-17E forecasts revised by -7%/-1%/+7% on delayed ramp-up in workload. Maintain BUY and TP of SGD5.75.
  

What’s New

SIA Engineering (SIAEC) reported 4QFY3/14 net profit of SGD65.2m (-1.1% YoY), marginally below our expectations. This was due to weak contributions from its Rolls-Royce JVs which we had anticipated (note), but the sharp magnitude of decline still took us by surprise. On a more positive note, full-year DPS payout rose 14% YoY to 25 SGD cts, including a special DPS of 5 SGD cts. This translates to a solid dividend yield of 5.2%, which compares favourably against its peers. Management expects group performance to remain stable in the year ahead.

What’s Our View

While weakness may persist for SIAEC’s Rolls-Royce JVs in the near term, we reiterate that longer-term trends remain positive as the global Trent engine fleet is expected to double over the next five years. Management is unfazed by the reduction in workload due to the improved reliability of Trent 700 engines, confident that maintenance work is merely delayed. The opening of its third hangar in the Philippines next month means contribution from the airframe maintenance business should improve in 2HFY3/15E. We tweak our FY3/15E/16E/17E EPS forecasts by -7%/-1%/+7%, mainly to reflect the delayed ramp-up in workload for its Trent engines. Our TP of SGD5.75 remains intact, based on a higher target multiple of 23x FY3/15E (previously 21x) to account for stronger EPS growth over a three-year horizon. As the best proxy to the structural air traffic growth in the region, SIAEC is our preferred exposure in the Singapore Transportation space. BUY reiterated.

Dividend play

The final dividend of 18 Scts could be the only positive from SIE’s results and the main reason for holding the stock. FY14’s core net profit was below our expectations (at 94% of our forecast), but in line with consensus (at 98% of consensus FY). Revenue growth was slower than expected at 2.7% compared to our forecast 7%. Higher subcontractor costs were also the reasons for SIE’s 3% yoy dip in earnings. We cut our FY15-17 EPS by 7-10% for slower revenue growth. Our target price (still based on blended valuations of 19x P/E & DCF) is reduced accordingly. Our Hold rating is maintained. Rerating catalysts could come from stronger-than-expected revenue and associates/JV growth.

104% dividend payout

SIE declared a final dividend of 18 Scts, bringing its total dividend to 25 Scts, with a total payout of 104%. This is on the back of its net cash of S$536m (+2% yoy). We believe this is helped by higher dividends repatriated from associates and JVs. This keeps the yield reasonably attractive at about 5%.

Slow revenue growth, higher sub-contractors, associates dominate profits

FY14’s revenue grew by 2.7% to S$1.18bn. Line maintenance grew by 3.5% yoy to S$438m, in line with our expectations. However, airframe MRO and fleet management grew by 2.6% yoy to S$744m vs. our expected S$795m. Operating costs were up 4% yoy to S$1.06bn. Staff costs were kept stable at 43% of total op. costs. However, subcontractor costs grew 22% yoy to S$43m (or 16% of total op. costs), possibly due to more outsourced work. Associates/JV remained the largest contributor at 61% of SIE’s PBT (+2% yoy).

Stable outlook

Management said that the demand for MRO services in Asia has continued to grow, but the aviation industry faces competitive challenges which have exerted pressure on MRO rates. Overall, the performance of the group is expected to remain stable, management said.

Limited near-term upside

SIE is trading close to +1 s.d above its 5-year mean. We see limited catalysts in the near-term given the muted revenue and earnings growth.