SIA Engineering

CIMB Research, Nov 8

SIE still offers steady earnings growth and yields of 4.5 per cent, backed by net cash of S$495 million. However, we believe its near-term positives have been priced in, as its share price has nicely recovered since our upgrade in September, now at 19 times 2014 P/E, +1.5 standard deviations above its five-year mean.

H1 2014 core EPS was in line, at 49 per cent of our FY14 forecast. A 7-cent interim dividend has been declared, similar to H1 2013 levels. We keep our target price, still based on blended valuations (19 times P/E and DCF). However, we downgrade the stock to "neutral" from "outperform" in view of limited catalysts for a further re-rating in the near term.

H1 2014 revenue was stable at S$583 million. Hangars have been booked out for the next six months, mainly for more-intensive C checks, especially of A380 aircraft. In H1 2014, SIE's line-maintenance unit handled 65,500 flights (+17 per cent yoy), thanks to the aggressive growth of LCC (low cost carrier) volume at Changi Airport. Operating costs were up 1.5 per cent yoy, mainly due to a 5.5 per cent yoy increase in staff costs on higher foreign-worker levies and annual increments, which is not alarming.

Only 10 per cent of SIE's workforce of 5,500 comprises foreigners. Management expects a "stable" performance ahead as the group leverages its diversified MRO (maintenance, repair, overhaul) services and presence in key markets.

Associate and joint venture profit rose 19 per cent yoy in H1 2014, led by the engine segment. SAESL continued to benefit from strong growth of Rolls-Royce engine volume. Eagle Services also received more jobs transferred from Pratt & Whitney's ceased US operations in Cheshire. Smaller associates/JVs are also past their gestation periods and have started to contribute.

We see limited catalysts for a further re-rating in the near term. Upside risk could come from a major accretive M&A, which we do not foresee in the near future.

NEUTRAL