OCBC Research on 23 Dec 2011
Both global air passenger load and capacity have been growing in CY11, diminishing the impact of the decline in air freight load and capacity on the maintenance, repair and overhaul (MRO) service providers such as SIA Engineering (SIAEC). But falling global air freight volumes, usually a leading indicator of air travel, and declining business confidence have clouded the outlook for the aviation and related sectors. But air travel traffic is expected to continue growing in the longer term and the global passenger aircraft fleet is forecasted to double from now to 2030. SIAEC’s setting up of two joint ventures with SAFRAN and Panasonic Avionics Corp in FY12 resulted in revenue, which would otherwise have contributed to its top-line, to be recorded at the joint venture level. Management explained that despite the near-term cannibalisation effect, these joint ventures will help it to gain a bigger growth potential in the longer term. With the longer-term outlook still relatively upbeat for SIAEC, we maintain our fair value estimate of S$3.88 per share and upgrade SIAEC to a BUY.
Growing air passenger traffic has provided good support. Both global air passenger load and capacity have been growing in CY11. And since the global passenger aircraft fleet is many times bigger than that of the freight aircraft fleet, the impact of the decline in air freight load and capacity on the maintenance, repair and overhaul (MRO) service providers, has been small.
Uncertain in short term but looks better in the longer term. Falling global air freight volumes, usually a leading indicator of air travel, and declining business confidence have clouded the outlook for the aviation sector. Similarly for the MRO service providers, such as SIA Engineering (SIAEC), the overhang surrounding the aviation sector may eventually cascade down to affect their business. However, the longer-term outlook for MRO service providers is looking good. Despite air travel being hit by terrorism, SARS and a global financial crisis, global annual air travel traffic still grew by 45% over the last 10 years. Adding further optimism, the global passenger aircraft fleet is forecasted to double from now to 2030.
Using joint ventures to expand footprint. The setting up of two joint ventures with SAFRAN and Panasonic Avionics Corp in FY12 resulted in revenue, which would otherwise have contributed to SIAEC’s top-line, to be recorded at the joint venture level. Management explained that despite the cannibalisation effect of the move, setting up these joint ventures is akin to giving up part of the work in Singapore in order to gain a share of the regional business. Revenue and net profit contribution could fall initially but the potential growth, as these joint ventures mature, will more than offset the short-term pain.
Maintain fair value of S$3.88 and upgrade to BUY. The share price of SIA Engineering Co Ltd (SIAEC) has recently been sold down by investors, together with most aviation-related names. Though the aviation sector is currently clouded by uncertainties in the global economy, the longer-term outlook for MRO service providers is still intact. Thus, we maintain our fair value estimate of S$3.88 per share and upgrade SIAEC to a BUY rating.
Uncertain in short term but looks better in the longer term. Falling global air freight volumes, usually a leading indicator of air travel, and declining business confidence have clouded the outlook for the aviation sector. Similarly for the MRO service providers, such as SIA Engineering (SIAEC), the overhang surrounding the aviation sector may eventually cascade down to affect their business. However, the longer-term outlook for MRO service providers is looking good. Despite air travel being hit by terrorism, SARS and a global financial crisis, global annual air travel traffic still grew by 45% over the last 10 years. Adding further optimism, the global passenger aircraft fleet is forecasted to double from now to 2030.
Using joint ventures to expand footprint. The setting up of two joint ventures with SAFRAN and Panasonic Avionics Corp in FY12 resulted in revenue, which would otherwise have contributed to SIAEC’s top-line, to be recorded at the joint venture level. Management explained that despite the cannibalisation effect of the move, setting up these joint ventures is akin to giving up part of the work in Singapore in order to gain a share of the regional business. Revenue and net profit contribution could fall initially but the potential growth, as these joint ventures mature, will more than offset the short-term pain.
Maintain fair value of S$3.88 and upgrade to BUY. The share price of SIA Engineering Co Ltd (SIAEC) has recently been sold down by investors, together with most aviation-related names. Though the aviation sector is currently clouded by uncertainties in the global economy, the longer-term outlook for MRO service providers is still intact. Thus, we maintain our fair value estimate of S$3.88 per share and upgrade SIAEC to a BUY rating.
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