Category: SIA Engg
SIAEC – CIMB
Positives priced in
SIE still offers steady earnings growth and yields of 4.5%, backed by net cash of S$495m. However, we believe its near-term positives have been priced in, as its share price has nicely recovered since our upgrade in Sep, now at 19x CY14P/E,+1.5 s.d. above its 5-year mean.
1H14 core EPS was in line, at 49% of our FY14 forecast. A 7 Sct interim dividend has been declared, similar to 1H13 levels. We keep our target price, still based on blended valuations (19x P/E and DCF). However, we downgrade the stock to Neutral from Outperform in view of limited catalysts for a further re-rating in the near term.
Stable performance
1H14 revenue was stable at S$583m. Hangars have been booked out for the next six months, mainly for more-intensive C checks, especially of A380 aircraft. In 1H14, SIE‟s line-maintenance unit handled 65.5k flights (+17% yoy), thanks to the aggressive growth of LCC volume at Changi Airport. Operating costs were up 1.5% yoy, mainly due to a 5.5% yoy increase in staff costs on higher foreign-worker levies and annual increments, which is not alarming. Only 10% of SIE‟s workforce of 5,500 comprises foreigners. Management expects a “stable” performance ahead as the group leverages its diversified MRO services and presence in key markets.
Associates and JVs rebounded
Associate and JV profit rose 19% yoy in 1H14, led by the engine segment. SAESL continued to benefit from strong growth of Rolls-Royce engine volume. Eagle Services also received more jobs transferred from Pratt & Whitney‟s ceased US operations in Cheshire. Smaller associates/JVs are also past their gestation periods and have started to contribute.
Limited near-term upside
SIE is now trading at 19x CY14 P/E, +1.5 s.d. above its 5-year mean. We see limited catalysts for a further re-rating in the near term. Upside risk could come from a major accretive M&A, which we do not foresee in the near future.
SIAEC – MayBank Kim Eng
Customer Fleet Growth A Positive
VietJetAir to expand A320 fleet, boon for SIAEC’s FMP service. VietJetAir, a Vietnam-based low-cost carrier, announced recently that it has signed a memorandum of understanding with Airbus for up to 92 A320s (42 A320neo, 14 A320ceo, six A321ceo and 30 purchase rights). It also said it will lease another eight A320s from third-party lessors. This means there is scope for SIAEC to extend the service contract under its Fleet Management Programme (FMP) to the future fleet of A320s, given that VietJetAir is an existing customer. The A320 family of aircraft forms the bulk of the fleet under its management and we believe this business segment will benefit from economies of scale as its customers continue to expand their fleet.
Changi Airport traffic growing from strength to strength. A total of 29,600 landings and take-offs were recorded at Changi Airport in Aug 2013, up 8.2% YoY. The increase was driven by a sustained uptrend in traffic growth momentum over the past few months. Longer term, traffic growth at the airport will remain highly visible as Singapore aims to double its terminal handling capacity by mid-2020s. As a dominant player at Changi Airport, we expect this development will keep SIAEC’s line maintenance division highly profitable.
Cash pile too high; time to review conservative capital structure? Over the past two years, we note that SIAEC has been hoarding cash and believe that it should increase its dividend distribution to shareholders. While the SIA Group has little problem funding the huge aircraft orders placed over the past year, we think SIAEC should return the excess cash to its parent company, which can then be redeployed to fund these future capital expenditure. In other words, perhaps the time is ripe for SIAEC to conduct a radical review of its conservative balance sheet and consider a more aggressive capital structure.
Top pick in the sector, reiterate BUY. SIAEC is our top pick in Singapore’s Transportation space as it is a pure play to the aviation growth story in the region.
Reiterate BUY with TP of SGD6.19.
SIAEC – MayBank Kim Eng
Customer Fleet Growth A Positive
VietJetAir to expand A320 fleet, boon for SIAEC’s FMP service. VietJetAir, a Vietnam-based low-cost carrier, announced recently that it has signed a memorandum of understanding with Airbus for up to 92 A320s (42 A320neo, 14 A320ceo, six A321ceo and 30 purchase rights). It also said it will lease another eight A320s from third-party lessors. This means there is scope for SIAEC to extend the service contract under its Fleet Management Programme (FMP) to the future fleet of A320s, given that VietJetAir is an existing customer. The A320 family of aircraft forms the bulk of the fleet under its management and we believe this business segment will benefit from economies of scale as its customers continue to expand their fleet.
Changi Airport traffic growing from strength to strength. A total of 29,600 landings and take-offs were recorded at Changi Airport in Aug 2013, up 8.2% YoY. The increase was driven by a sustained uptrend in traffic growth momentum over the past few months. Longer term, traffic growth at the airport will remain highly visible as Singapore aims to double its terminal handling capacity by mid-2020s. As a dominant player at Changi Airport, we expect this development will keep SIAEC’s line maintenance division highly profitable.
Cash pile too high; time to review conservative capital structure? Over the past two years, we note that SIAEC has been hoarding cash and believe that it should increase its dividend distribution to shareholders. While the SIA Group has little problem funding the huge aircraft orders placed over the past year, we think SIAEC should return the excess cash to its parent company, which can then be redeployed to fund these future capital expenditure. In other words, perhaps the time is ripe for SIAEC to conduct a radical review of its conservative balance sheet and consider a more aggressive capital structure.
Top pick in the sector, reiterate BUY. SIAEC is our top pick in Singapore’s Transportation space as it is a pure play to the aviation growth story in the region.
Reiterate BUY with TP of SGD6.19.
Airport Services – CIMB
The sky is the limit
Despite the sharp fall in ASEAN currencies, Changi Airport’s traffic rose by 8.2% yoy in Aug2013 (the highest since Apr 2012) to reach a record high of955 flights per day. Travel to and from neighbouring Indonesia and Malaysia registered particularly strong growth.
We maintain our Overweight recommendation on the sector. SATS is our top pick, given its attractive valuation of 16x CY14 P/E and better liquidity. There are no changes to our EPS, recommendations and target prices. The catalysts for the sector are Changi’s stronger-than-expected volume growth and higher dividends.
What Happened
Singapore Changi Airport released its Aug 2013 traffic statistics, which revealed that the flights handled increased by 8.2% yoy to a new record high of 955 flights/day. Passengers handled rose 9.4% yoy to 4.68m. Travel demand in Aug was boosted by the extra long weekend, thanks to the Hari Raya Puasa and National Day public holidays in Singapore. Traffic between Singapore, China and Japan also grew by double-digits.
What We Think
Changi Airport’s better-than-expected passenger movements are encouraging because the ASEAN region was embroiled in foreign currency volatility in the past few months.
Due to capital outflows, the Malaysian ringgit (RM) weakened against the S$ by 0.8% mom in July and a further 2.3% mom in Aug. The Indonesian rupiah (Rp) fell against the S$ by 0.9% mom in July and 5.1% in Aug, and depreciated by a further 6% mom in Sep but has since stabilised, albeit at the lower level of Rp9,000 to the S$ (vs. Rp8,000 in Jun 2013). The RM recovered against the S$ by 0.1% mom in Sep.
Although the weaker regional currencies may impact outbound travel in the near term, the macro outlook for Southeast Asia remains positive. This supports our expected 2014 rebound in outbound travel. We forecast that the average GDP growth in Indonesia, Thailand and Malaysia will rebound from 4.8% in 2013 to 5.2% in 2014 and 5.7% in 2015 (vs. 6.1% in 2012). Furthermore, the strong traffic growth between Singapore, China and Japan appears sustainable, given the improved economic outlook for North Asia.
What You Should Do
Stay invested in SIE and SATS. We expect share price upside in both companies from higher volumes in line maintenance and gateway services, given the positive statistics.
SIAEC – CIMB
Emerging value
SIA Engineering (SIE) is likely to benefit from stronger regional travel, spurred by weak currencies. The share price has pulled back by 11% from its peak in May, making it more attractive. We upgrade our rating to Outperform from neutral.
We roll over our valuations to CY15 and upgrade our target price to S$5.20, still based on blended P/E and DCF. SIE is one of the top 10 non-REIT, high-yield Singaporean plays that are in a net cash position and has sustainable earnings growth prospects. We raise our EPS by 2% in FY16 based on higher growth in the line maintenance business. The catalysts are better-than-expected earnings and dividends.
Weak currencies boost regional travel
We expect SIE to benefit from the increase in regional air travel, which will continue on the back of weak currencies. Passenger movements between Singapore and Bali-Denpasar, Sydney, Tokyo (among Changi’s top 10 cities) registered double-digit increases in Jul 2013, in line with the weakened currencies of these countries.
Flights handled in Changi can only go up
The number of flights handled in Changi rose by an encouraging 7% yoy to 934 flights per day in Jul 2013 after a tepid average monthly increase of 5% yoy since Jun 2012. The Civil Aviation Authority of Singapore (CAAS) estimates that Changi Airport will have the capacity to handle up to 430,000 flights p.a. (1,178 flights per day) in 2018, based on 5% p.a. flight volume growth. This suggests that there is 26% upside from the existing base volume and that SIE’s line maintenance business can only go up. We marginally increase our line maintenance sales growth estimates in FY15-16 to 6% from 4%.
Attractive dividend yields
SIE’s net cash at end-1Q14 stood at S$622m, which is a level that could lead to special dividends, as in FY06 and FY11 when net cash exceeded S$500m. However, we have conservatively assumed 90% dividend payout ratio and net dividend yield of 5% in FY14. If there are no major M&As by end-FY14 and net cash still hovers above S$500m, we believe that SIE will maintain its good track record of rewarding shareholders via special dividends. The average dividend payout ratio in FY06 and FY11 was 130%, or c.S$0.33/share, resulting in a dividend yield of 7%.