SIA Engineering

Maybank Kim Eng Research on 21 May 2013

SINGAPORE Airlines (SIA) had been trying out various means to restructure its business model over the years, which includes the introduction of low cost carrier units (Scoot & Tiger Airways), aircraft reconfigurations to fit business conditions and orders for new aircraft. In order to cater to growing demand for regional air travel, SIA also recently placed a record aircraft order for SilkAir.

Collectively, SIA, SilkAir and Scoot have 143 aircraft on order as compared to their current combined fleet of 127 aircraft, which is a reflection of the future growth in MRO (maintenance, repair and overhaul) work for SIA Engineering Co (SIAEC). On top of this, we believe that SIAEC offers excellent exposure to the structural growth in air traffic in the Asia Pacific region, which would account for 35 per cent of global aircraft deliveries over the next 20 years. Sixty-five per cent of the group's pro-forma revenue comes from non-SIA customers.

We believe that there is latent value in the joint ventures (JVs) held by SIAEC, which could be unlocked with a separate listing. In particular, we are bullish on the outlook for one of its JVs with Rolls Royce, SAESL, which specialises in the repair and overhaul of Trent engines. Our bullish view on the prospects for the JV is backed by the 2,400 Trent engines on Rolls Royce's order book (versus the 2,200 Trent engines currently in service). For the aircraft on SIA's order book, five A380s (Trent 900), 40 A350s (Trent XWB) and 14 A330s (Trent 700) will be utilising the Trent series of engines. We believe that SAESL's future workload could increase even further, if Scoot decides on using the Trent 1000 engines for its new fleet of 20 B787s.

Upgrade to "buy", target price of $6.16 based on sum-of-the-parts (SOTP) methodology. Given the diversity of the underlying businesses, we believe that the stock is best valued using SOTP. While PE multiples appear rich relative to its historical trading range, we argue that there is hidden value within its business units that are not fully reflected with a PE valuation method. Our SOTP does not take into account potential upside from a separate spin-off of its JVs. Furthermore, in the current low interest rate environment, we expect stock interest to remain high with its strong track record of dividend distributions. On our forecast, SIAEC offers potential three-year yield of 4.6-5.0 per cent.

BUY