SIA Engineering

OCBC on 9 May 2012

SIA Engineering Co Ltd (SIAEC) released its 4QFY12 report card which was largely in line with our expectations. In FY12, revenue from SIAEC’s Fleet Management segment jumped 33% to S$218m while its share of profits of JV and associated companies grew 9% to S$157m. Management also proposed a final dividend of S$0.15/share. With most of its revenue denominated in USD, SIAEC’s profit margins will likely face further downward pressure if the USD weakens. We increase our fair value estimate of SIAEC to S$4.04/share but downgrade it to HOLD, after a 17% gain in its share price over the last three months.

Record quarterly revenue but lower margins
SIA Engineering Co Ltd (SIAEC) once again recorded an all-time high quarterly revenue in its 4QFY12 financial results. 4QFY12 revenue grew 16% YoY and 4% QoQ to S$317m, while PATMI gained 9% YoY and 4% QoQ to S$66m. For FY12, SIAEC’s revenue of S$1.17b was 3% higher than both our and consensus estimates, while PATMI came in at S$269m, or in line with our estimate of S$270m but 1% higher than consensus. 4QFY12 and FY12 operating margins fell 1ppt and 1.2ppt respectively from a year earlier to 10.3% and 11.1%. Management partially attributed the higher expenses to increased subcontract costs, arising from higher revenue from its higher fleet management segment. Going forward, with most of its revenue denominated in USD, SIAEC’s profit margins will likely face further downward pressure if the USD weakens.

Fleet management segment was revenue growth driver
SIAEC’s Airframe Maintenance and Line Maintenance segments recorded little revenue growth in FY12. However, revenue from its Fleet Management segment jumped 33% to S$218m. Furthermore, SIAEC now services a fleet of 160 aircraft for 13 customers in this segment, as compared to 140 aircraft and 11 customers at end-FY11. Other notables are 1) SIAEC’s share of profits of JV and associated companies in FY12 grew 9% to S$157m, contributing to 52% of its pre-tax profit, and 2) management proposed a final dividend of S$0.15/share, which comes after an interim dividend of S$0.06/share.

Downgrade to HOLD despite higher fair value
We increase our fair value estimate of SIAEC from S$3.88/share to S$4.04/share. This is based on 17.0x FY13F EPS, which is 0.5 standard deviation higher than its five-year average P/E and an increase from the previous multiple of 15.6x. Since our last report on 1 Feb 2012, SIAEC’s share price has gained 17% to S$4.06, outperforming the STI’s 1% gain over the same period. Despite the increase in our fair value estimate, we downgrade its rating to HOLD on valuations ground following its stellar price appreciation.