WE peg a higher PE of 15x (five-year mean) in our blended valuation following a more positive maintenance, repair and overhaul (MRO) outlook. We refine our EPS as we update some assumptions. Maintain 'outperform' with catalysts anticipated from strong earnings growth.
We believe SIA's workload alone can sustain utilisation rates at all of SIAE's six hangars. About 41 of SIA's aircraft are due for 'D' checks in 2012-13, in our estimation. These would comprise the first 'D' checks (after five years of flying) for six A380-841s and 12 B777-312s. There are also 18 B777-212s scheduled for second 'D' checks.
Management expects the hangars to be at least 70 per cent utilised in the next five years, backed by long-term contracts and current order book.
We are bullish on the MRO industry. Despite climbing oil prices, passenger load factors remained at historical highs. As aircraft utilisation rises, we expect demand for heavy maintenance services to rise.
SIAE has outperformed the market by about 11 per cent since our upgrade in February 2012. We see room for further upside given the steady growth of its MRO business. As risks of an economic downturn dissipate, we see less likelihood of capacity cuts by airlines.
In a bull market, SIAE could trade up to 19x forward P/E. We believe the market has not priced in its earnings growth of 5-7 per cent through 2014 as SIAE is trading at its March 2010 valuations when its earnings dipped 10 per cent. We prefer SIAE to ST Engineering for its more attractive valuations.
OUTPERFORM
OUTPERFORM
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