SIA Engineering

UOBKayhian on 30 Oct 2013

(SIE SP/HOLD/S$5.09/Target: S$4.65)
FY14F PE (x): 20.2
FY15F PE (x): 19.1

ST Engineering (STE) gains and SIAEC loses. Jetstar Asia ( Jetstar) signed a three-year line maintenance contract with ST Aerospace for its existing and future fleet of Airbus A320 aircraft. Prior to this, SIA Engineering (SIAEC) handled Jetstar's line maintenance while STE handled most of the heavy maintenance work. Based on Jetstar’s weekly seat capacity, we estimate it could have accounted for at least 6% of 1H13’s flight movements out of Changi and proportionately a higher percentage of line checks by SIAEC. SIAEC’s line maintenance revenue could thus remain flat yoy or register a marginal decline.

Maintain SELL. SIAEC is trading close to its 5-year peak PE valuation and +2SD level. We believe this is excessive, especially given the loss of Jetstar Asia and the potential loss of Qantas Airways as customers. Maintain SELL and target price of S$4.65, based on DDM (COE - 6.9%, terminal growth rate 1%).