Undemanding relative valuations, attractive yields. We like SIA Engineering (SIE) for its undemanding valuations versus its peers like ST Engineering and HK Aircraft Engineering Co (HAECO) and attractive dividend yields of 5.1-5.3% p.a. Our target price of SGD4.95 implies a 15% total return including dividends, backed by resilient earnings and strong cashflows. We continue to favour the aviation engineering sector for its resilient growth prospects.
Under-appreciated within sector. Headlining SIE’s investment case is its relative value that has emerged within the aviation maintenance, repair and overhaul (MRO) sector. SIE currently trades at a lower PER of 16.7x versus its peer average of 18.8x, while dividend yield of ~5.1% is almost a full percentage point higher than its peer average of 4.2%.
Sector outlook rosy, SIE well-poised to benefit. Industry forecasts for the aviation MRO sector are still showcasing steady growth especially in Asia. In addition, we favour SIE for its ability to grow its non-SIA customer base as an affirmation of its ability to gain traction from an increasing trend of outsourced MRO functions from other airlines. This allows SIE an enviable balance between a
diversified customer base and a foundation to lean on: SIA’s MRO business.
Resilient business supports attractive yields. SIE’s record of profitability seems to corroborate the thesis of resilience within the aviation MRO sector. Even during times of global economic crises, SIE’s earnings remained stable and, together with strong cashflows, formed the basis of an increasing dividend payout trend.
Favoured play in aviation engineering: Reiterate BUY. We peg SIE’s valuation to 18.3x FY3/14 PER, one standard deviation above its historical mean. Our Target Price of SGD4.95 implies 15% total returns inclusive of a 5.1% dividend yield. SIE is now our pick in the aviation MRO sector based on its undemanding relative valuations. Reiterate BUY.
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