SIA Engineering

Kim Eng on 25 Jul 2012

1QFY3/13 results in line. SIA Engineering (SIE) reported 1QFY3/13 NPATMI of SGD 70.1 m, making up 25% of our full year FY3/13 forecast. Although revenue improved 8.2% YoY to SGD 300.5 m, cost pressures contributed to a 0.9% drop in operating profit to SGD 34.4 m. JVs and Associates continued their significant contribution (~51% of PBT) to SIE’s bottomline, posting a 7.5% increase YoY.

Cost pressures and Margin concerns. In our previous note, we had highlighted our concerns of margin erosion and a delayed recovery in the aviation sector as key risks for SIE. These risk factors are still largely prevalent, with higher subcontract, staff and material costs being cited by SIE as main contributors to its 9.6% YoY increase in operating expenditure for 1QFY3/13.

Supported by positive MRO macro outlook. Amidst a possible delay in an aviation sector-wide recovery, the MRO segment remains relatively resilient, with a ~4% CAGR growth forecasted globally (Fig 2) for the next 5 years. 1H2012 aircraft movement at Changi Airport has also maintained strong growth of 10.2% YoY (Fig 3), offering further growth support for SIE on a domestic front. SIE’s strong balance sheet with its net cash position of SGD 572 m and healthy cash-generating business (1QFY3/13 net cash inflow of +SGD 75.9 m) should continue to support a steady, growing dividend payout.

Within expectations, maintain HOLD. With SIE’s results in line with ours and consensus forecasts, we maintain our HOLD call, pegged to SIE’s historical PER average of 15.4x FY3/13 earnings. Existing investors keen on pure aviation engineering exposure can continue to enjoy SIE’s dividend yields in the 5-6% range. However, we reiterate our preference for ST Engineering in the aviation engineering sector, for its defense-backed contracts and strong orderbook which provides better earnings visibility.