SGX Yield Stock

Strong Quarter, Associates Outperformed

Maintain BUY, TP: SGD6.34. We remain positive on SIAEC and raised our estimates by 2%-4% over FY14-16, mainly to account for better-than-expected performance from its associates. SIAEC is a key beneficiary of plans to double Changi Airport’s capacity over the next decade and is our top pick in the Singapore Transportation space. We maintain our BUY rating and raised our TP to SGD6.34.

SAESL & IECO continue to shine. The combined earnings from SAESL & IECO increased by 13% YoY for 1HFY03/14 (34% of PBT) due to growing demand for maintenance work with the influx of Trent engines into the region. The outlook for these units is highly visible given the huge aircraft orders for Trent engines (Fleet: 324, Order: 416). These two units will continue to be a key profit driver and account for half of our valuation for the stock.

Contributions from associates beat expectations. We are positively surprised by the strong associate contributions for 1HFY03/14 (+30% YoY, 25% of PBT), lifted by the Line & Component cluster. The Pratt & Whitney related companies, which provides the engine & engine part repair & overhaul services, reversed the decline in earnings over the past year to report higher contributions for 1HFY03/14 (+21% YoY).

Offset soft performance at core Line, Repair & Overhaul business. Performance for the core Line Maintenance, Repair and Overhaul business of the company was fairly soft with operating profits declining 14% YoY for 1HFY03/14, largely due to a 5.5% YoY increase in staff cost. While labour-induced margin pressure persisted, the long-term outlook for this business remains bright, in our view. The plan to double Changi Airport’s capacity over the next decade will increase workloads for MRO companies based in Singapore. As a dominant player in the Line Maintenance market, SIAEC is a direct proxy to this trend. The expansion into the Philippines will increase SIAEC’s competitiveness by tapping into cheaper source of labour.

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.