SIA Engineering Co Ltd - 1QFY12 results in line (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$4.16

Fair Value: S$4.21

1QFY12 results within expectations. SIA Engineering Company (SIAEC) reported its 1QFY12 results last evening, which came in within our expectations. Though revenue eased 3.7% YoY to S$277.6m, mainly due to lower contribution from materials, we note that it was up 2.1% QoQ and was just 0.9% shy of our forecast; it also met around 23.1% of our FY12 estimate. Net profit attributable to shareholders (PATMI) also saw a YoY decline of 3.8%, mainly due to the absence of job credits that SIAEC had enjoyed in 1QFY11. However, on a QoQ basis, it jumped 11.8%, and was also 3.2% above our expectation, aided by higher share of profits of associated companies; PATMI met 23.7% of our FY12 forecast. On the balance-sheet front, SIAEC continues to remain debt-free, and has even managed to grow its cash balance to S$645.0m, an increase of S$63.6m since end Mar 2011.

Maintains fairly upbeat near-term outlook. Going forward, management expects the demand for its core businesses (line maintenance, airframe and component services, and fleet management) to be sustained in the near-term. Recall that SIAEC had recently announced the renewal of its comprehensive Services Agreement with Singapore Airlines Cargo (SIA Cargo), where it expects the 5-year deal to add S$358m in revenue to its order books. SIAEC adds that it will continue to pay close attention to productivity improvements and cost management. And in this aspect, we note that SIAEC has done quite a good job in the last quarter, as operating margin has improved to 12.5% from 11.3% in 4QFY11, and almost back to the 12.6% recorded in 1QFY11.

External shocks are still prevalent. However, it notes that it expects the prevailing global economic uncertainties and oil price volatility to continue to impact the aviation industry. Indeed, the IATA (International Air Transport Authority) also warns of risks associated with the political unrest in the Middle East and the European currency crisis. Even though it expects the airline industry to make US$4b this year, IATA notes that the margin is a "pathetic 0.7%" and another shock could alter the industry's fortunes dramatically. Another potential risk for SIAEC would be further volatility in foreign exchange, although it managed to make a forex gain of S$1.5m in the previous quarter.

Maintain HOLD with S$4.21 fair value. As the results were in line with our forecast, we opt to keep our FY12 estimates unchanged; our fair value also remains at S$4.21 (still based on 16x FY12F EPS). But given the still attractive dividend yield of 5.3% expected for this year, we maintain our HOLD rating.