Event
SIA Engineering’s (SIE) share price has declined to hit our bearish target of $3.66 before recovering. On valuation grounds, the stock justifies being raised to HOLD at current prices, supported by an attractive dividend yield of 5.4%. Despite headwinds in the aviation sector, SIE’s earnings are expected to stay resilient and we anticipate further upside to come from an expanded fleet under management through Singapore Airlines’ (SIA) upcoming low cost long-haul carrier. No change to our $3.66 target price for now.
Our View
With the pullback in share price, SIE has returned to its mid-cycle P/B valuation of around 3x. However, an analysis of the group’s earnings profile during down-cycles indicates that while there is some slowdown, earnings do not fall off a cliff, unlike the airlines. Most of SIE’s customers remain in a good position to ride out the storm, and the Asian aviation sector continues to expand even in difficult times.
SIA still accounts for 60% of SIE’s core revenue and about 23% when we include associates and JVs. Core operations will continue to benefit from this relationship with SIA, as SIA has historically not cut back or deferred on its maintenance programmes during down-cycles. This will continue to provide a stable earnings base for SIE. In fact, SIA is committed to its ongoing airline delivery schedule and has placed new orders for eight B777-300s and leased 15 A330s.
SIE is also likely to secure the maintenance contracts for SIA’s planned long-haul budget airline. The new carrier will use SIA’s old B777-200s, which SIE is familiar with. The airline is expected to start operations early next year. We estimate an initial fleet of 10 aircraft.
Action & Recommendation
The stock currently trades at 15.5x FY Mar12F EPS. While not particularly cheap, SIE’s share price should be propped up by the stability of its earnings and its ability to continue paying a healthy dividend. Dividend yield currently stands at 5.4%.
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