SIA Engineering

DBS Group Research on 6Fe b2013

SIA Engineering's (SIE) results fail to excite. Q3 FY March 2013 net profit of $67 million (up 6 per cent y-o-y) was slightly lower than our projections, as revenue of $278 million (8 per cent lower y-o-y) fell short of our estimate.

The decline in revenue came from lower fleet management and project revenue. Operating margin was stable at 11.2 per cent, compared to 11.1 per cent achieved in FY2012. Profits from joint venture/ associates remained largely stable at $40 million, accounting for close to 53 per cent of group profit before tax in Q3 FY2013. Given that 9M FY2013 revenue and margins are lagging our estimates, we revise down our earnings projections for FY2013/2014 by about 2 per cent each.

Management expects that business should remain stable in Q4 FY2013 but macro uncertainties will continue to impact the aviation industry. Nevertheless, earnings for SIE should remain resilient and benefit from the expansion in traffic in the high-growth Asia-Pacific region, including its home base at Changi Airport, but growth in flight movements may decelerate due to high base effect.

SIE's solid balance sheet, steady earnings and attractive dividend outlook have been well appreciated by investors, resulting in strong re-rating in recent months. Even accounting for the prevailing yield compression story, the stock has not only outperformed its peers but also other high-dividend plays. It is currently trading at 20 times FY2013 PE and 4.4 per cent yield, and we think the upside is limited at this point, given that it is trading close to historic high valuations.

We do not expect strong earnings growth or any special dividends this year to justify any further re-rating. Hence, while we revise up our target price to $4.80 to account for stronger sentiment and market yield compression, we cut our recommendation to "hold".

HOLD