• Uncertainties in the aviation industry
• 1HFY13 financials in line
• Raise FV to S$4.48
Stable outlook in near term
The ongoing contraction in air freight volumes (usually a leading
indicator of air travel) and poor consumer confidence have continued
to weigh on the outlook for the aviation sector. If the poor sentiment
persists, growth in the global fleet could take place more gradually
and this would affect the future growth track of maintenance, repair
and overhaul (MRO) service providers. The management of SIA
Engineering (SIAEC) expects that demand for the company’s core
businesses will be sustained in the near term.
Growth over the LT in MRO
We note that the current longer term outlook for MRO service
providers such as SIAEC remains positive, with the global passenger
aircraft fleet set to grow by 3.8% p.a. from now till 2030 to 32,551,
as forecasted by Airbus. According to Team SAI Consulting, for 2012-
2022, Asia’s MRO market will see CAGR growth of 6.1%, versus 2.9%
for Europe and only 0.9% for the Americas. With its Singapore MRO
base and regional JVs/associates, SAIEC can benefit from the
geographic distribution of the growth, although we also note that the
strong SGD may affect its margins.
1HFY13 financials in line with expectations
To recap, 1HFY13 financial results were generally in line with our
expectations. Revenue climbed by 6.4% YoY to S$585m, attributable
mainly to revenue from materials, fleet management program and
line maintenance. Operating margin declined 1.4ppt from 1HFY12 to
11.1% in 1HFY13 because of higher material cost, exchange loss, and
increase in subcontract and staff costs. The share of profits from
associated and joint venture companies increased 1.4% YoY to
S$78.8m, accounting for 51% of SIAEC’s pre-tax profits.
Raise FV to S$4.48; maintain HOLD
Using a higher P/E peg of 17.1x (one standard deviation above the 4-
year average of 14.6x) and our basic EPS forecast of 26.2 S cents for
3QFY13F-2QFY14F, we increase our fair value estimate from S$4.14
to S$4.48 but maintain our HOLD rating on SIAEC on valuation
grounds.
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