Yield compression

SIE’s share price has outperformed the index by 12% YTD due to investors’ preference for high yield plays. However, with its less-than-spectacular FY3/13 results and dividend yield compression to 4.4%,we see limited upside to the share price.Maintain Neutral.

FY13 net profit is below expectations, at 94% of our forecast and 97% of consensus, because of a revenue shortfall. 4Q net profit accounted for only 23% of our FY13. SIE increased its dividend payout from 85% to 90% with a final DPS of 15 Scts (total DPS: 22 Scts). We cut our FY13-15 EPS by 8% for lower revenue but raise our target price, still based on blended P/E (19x from 15x) and DCF, in view of increased appetite for yield stocks.

Lower revenue, higher staff costs

4Q revenue fell 10% yoy but was stable qoq, taking FY13 revenue to S$1.15bn. FY13 revenue from repair and overhaul fell 5% yoy to S$725m due to lower volume of FMP and project revenue (cabin interior reconfiguration of aircraft). Revenue from line maintenance improved 5% yoy to S$421m, backed by a higher number of flights handled/day (+1% qoq, +5% yoy) in Changi Airport. EBITDA margin dipped 30bp to 14.3% due to higher staff cost, which accounted for 43% of operating costs (previously 40%). EBITDA margin would have been 11.6%, if not for the S$3.6m write-back of debt provisions and S$3.3m forex gain.

Weaker associates

Associates’ profit fell 30% yoy to S$63m while JV profit rose 22% yoy to S$96.2m. This could due to a weaker showing by Eagle Services (services P&W engines) compared to SAESL which services Rolls Royce engines.

Zero growth in earnings

Despite steady growth in flights handled in Changi airport in FY13 with no major capacity cuts among airlines, SIE achieved zero profit growth vs. its historical c.4% p.a. Management expects its performance to be stable in the near term but emphasised that the operating environment remains challenging due to uncertainties in the global economy.

High flyer could take a breather

• Results slightly below; 9MFY13 earnings growth of about 1% not exciting
  
• Secure and attractive dividend expectations fuelled strong share price performance
  
• Trading close to historic high valuations; further re-rating unlikely at this point
  
• Downgrade to HOLD; TP revised up to S$4.80
  

Results fail to excite. 3Q-FYMar13 net profit of S$67m (up 6% y-o-y) was slightly lower than our projections, as revenue of S$278m (8% lower y-o-y) fell short of our estimate. The decline in revenue came from lower fleet management and project revenue. Operating margin was stable at 11.2%, compared to 11.1% achieved in FY12. Profits from JV/ associates remained largely stable at S$40m, accounting for close to 53% of group PBT in 3Q-FY13. Given that 9M-FY13 revenue and margins are lagging our estimates, we revise down our earnings projections for FY13/14 by about 2% each.

Steady outlook. Management expects that business should remain stable in 4Q-FY13 but macro uncertainties will continue to impact the aviation industry. Nevertheless, earnings for SIE should remain resilient and benefit from the expansion in traffic in the high growth Asia-pacific region, including its home base at Changi Airport, but growth in flight movements may decelerate due to high base effect.

But further re-rating unlikely. SIE’s solid balance sheet, steady earnings and attractive dividend outlook has been well appreciated by investors, resulting in strong re-rating in recent months. Even accounting for the prevailing yield compression story, the stock has not only outperformed its peers but also other high dividend plays. It is currently trading at 20x FY13 PE and 4.4% yield, and we think upside is limited at this point, given that it is trading close to historic high valuations. We do not expect strong earnings growth or any special dividends this year to justify any further re-rating. Hence, while we revise up our TP to S$4.80 to account for stronger sentiment and market yield compression, we cut our recommendation to HOLD.

Take a breather

This is the time to book some profits off SIA Engineering on unexciting3Q13 results and 33% share price outperformance since Jan2012. We believe capacity growth in Changi Airport and high hangar utilisation from airframe maintenance have been factored in.

3Q13 net profit is 10% below our expectations and 6% below consensus on lower-than-expected revenue. However, 9M13 is broadly in line, at 71% of our FY13 forecasts, thanks to a strong 1H13. We maintain our EPS forecasts and blended P/E and DCF-based target price. We think the valuation is stretched at 18x CY13 P/E, near its peak of 19x. However, we maintain our Neutral rating on decent dividend yield of 4.5%.

Lower fleet and project revenue

3Q13 revenue fell 8% yoy and 2% qoq from lower fleet management and project revenue (lumpier in nature). We believe line maintenance volumes could be higher (breakdown of revenue by business segment was not disclosed), helped by the 2% qoq annualised growth in aircraft movement in Changi Airport in Oct-Dec 2012. Airframe & component overhaul (typically contributes 48% of the group’s revenue) should remain stable.

Gradual margin improvement

EBITDA margin inched up to 14.3% (2Q13: 13.9%, 3Q12: 12.3%) due to lower subcontract services and material costs, a reflection of lower project revenue. The margin also improved due to an S$0.8m forex gain in 3Q13.

Associates and JVs benefit from stronger US$ qoq

Associates profit was up 8% qoq, but down 27% yoy to S$17.5m. JV profits remained stable qoq and rose 22% yoy to S$22.5m. We think this is due to higher market share of Rolls Royce engines (serviced by SIE’s associate Eagle Services) over Pratt & Whitney engines (serviced by SIE’s JV, SAESL) globally. Stronger US$/S$ from 2Q13 to 3Q13 (exchange rate of 1.22-1.25) could have helped in the translation of profits.

Near peak, switch to SATS

SIA Eng’s share price has outperformed the index by 33% since Jan 12 and now trades close to its historical peak. We recommend switching to SATS to take advantage of the capacity growth in Changi Airport, with easing food inflation being an additional catalyst.

Downgrade to Neutral from Outperform with unchanged target price, on blended P/E and DCF valuations. Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, we still like its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings. Our EPS remains intact. We will revisit this stock on margin expansion or stronger-than-expected volume from airframe maintenance.

Fully valued

At 18x CY13 P/E and 4.3x CY12 P/BV, SIE is trading above +1 s.d. of its 5-year mean, with an implied earnings growth of 12% from FY13-15. This suggests a much more bullish outlook of MRO spending vs. the global industry forecast of 4%. We note that SIE has only achieved an average growth of 3% since 2007. The upside risks to our argument could come from stronger-than-expected (85%) dividend payout in FY13.

Strong growth in Changi factored in

We believe the recent share price surge is partly due to optimism over Changi’s breakthrough, with an average of 920 flights handled per day, crossing the 900 mark for the first time. However we have factored in 9% yoy growth in FY13 for SIE’s line maintenance volume, which outpaced the expected growth in capacity expansion in Changi of about 4%.

Switch to SATS

SATS, with stronger earnings growth (3-year CAGR of 10%), could be a cheaper pick at 17x CY13 P/E vs. SIE’s 18x and lower earnings growth. Secondly, SATS has potential for margin expansion if food inflation is kept at bay (refer to Wen Ching Lee’s SATS report entitled “Ready for take-off” and dated 22 Jan 2013). Meanwhile, SIE’s margin is trending downwards on the back of higher subcontractor and materials costs. Finally, SATS offers higher share liquidity with a 57% free float vs. SIE’s 20%.

Near peak, switch to SATS

SIA Eng’s share price has outperformed the index by 33% since Jan 12 and now trades close to its historical peak. We recommend switching to SATS to take advantage of the capacity growth in Changi Airport, with easing food inflation being an additional catalyst.

Downgrade to Neutral from Outperform with unchanged target price, on blended P/E and DCF valuations. Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, we still like its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings. Our EPS remains intact. We will revisit this stock on margin expansion or stronger-than-expected volume from airframe maintenance.

Fully valued

At 18x CY13 P/E and 4.3x CY12 P/BV, SIE is trading above +1 s.d. of its 5-year mean, with an implied earnings growth of 12% from FY13-15. This suggests a much more bullish outlook of MRO spending vs. the global industry forecast of 4%. We note that SIE has only achieved an average growth of 3% since 2007. The upside risks to our argument could come from stronger-than-expected (85%) dividend payout in FY13.

Strong growth in Changi factored in

We believe the recent share price surge is partly due to optimism over Changi’s breakthrough, with an average of 920 flights handled per day, crossing the 900 mark for the first time. However we have factored in 9% yoy growth in FY13 for SIE’s line maintenance volume, which outpaced the expected growth in capacity expansion in Changi of about 4%.

Switch to SATS

SATS, with stronger earnings growth (3-year CAGR of 10%), could be a cheaper pick at 17x CY13 P/E vs. SIE’s 18x and lower earnings growth. Secondly, SATS has potential for margin expansion if food inflation is kept at bay (refer to Wen Ching Lee’s SATS report entitled “Ready for take-off” and dated 22 Jan 2013). Meanwhile, SIE’s margin is trending downwards on the back of higher subcontractor and materials costs. Finally, SATS offers higher share liquidity with a 57% free float vs. SIE’s 20%.