By Kevin Tan
Tue, 13 Apr 2010, 09:02:16 SGT

The aviation industry has been picking up momentum since the beginning of 2010. We view this continued improvement in demand for scheduled air traffic as a positive for MRO provider SIA Engineering Company (SIAEC), as airlines look to rebuild capacities, hence translating to more MRO projects for the group. Nevertheless, we acknowledge that the growth outlook for MRO market in the near term may still be tenuous and is largely linked to the health of the global economy. As such, we keep our FY10 forecasts unchanged, but adjust our FY11 estimates upwards by 2.4-4.8% to factor in a more affirmative recovery in the MRO market expected from 2H10 onwards. Our fair value is raised from S$3.19 to S$3.66 as we peg a higher PER of 18x (14.5x previously) to our SOTP earnings component. At current price, we maintain HOLD on SIAEC.

Improvement in scheduled air traffic a positive for MRO providers. The aviation industry has picked up momentum since the beginning of 2010. According to the International Air Transport Association (IATA), international passenger demand and cargo demand were up 9.5% YoY and 26.5% YoY respectively in February, following a 6.4% YoY and 28.3% YoY increase in passenger and cargo demand in January. In Singapore, we note that Changi Airport has also seen a 21.5% YoY increase in passenger movements in February, continuing a 10.1% YoY rise in January. We view this continued improvement in demand for scheduled air traffic as a positive for MRO provider SIA Engineering Company (SIAEC), as airlines may now be looking to rebuild their capacities (including bringing their older aircrafts back into service, which may require comparatively more maintenance), hence translating to more MRO projects for the group.

Renewal of Services Agreement with SIA. We also see SIAEC’s recent renewal of its comprehensive Services Agreement with Singapore Airlines (SIA) as an indication of a recovery in the MRO market, as well as that of continued confidence and satisfaction that SIA has in the quality of the engineering services provided by the group. As a recap, the new agreement is firm for three years, with a two-year extension if agreed conditions are met. In total, the agreement is projected to add S$2.2b in labour revenue to SIAEC’s order books.

MRO market growth may be tenuous though. Nevertheless, we acknowledge that the growth outlook for the MRO market may still be tenuous and is largely linked to the health of the global economy. We note market consultancy firm TeamSAI’s call for a 7.5% decline in the civil aviation MRO market in 2010, before staging a 3.4% CAGR over the next five years. As such, we prefer to maintain our conservative stance in the near term.

Maintain HOLD. We are keeping our FY10 forecasts unchanged. However, we now adjust our FY11 estimates upwards by 2.4-4.8% as we see potential for SIAEC to benefit from a more affirmative recovery in the MRO market expected from 2H10 onwards. Pegging a higher PER of 18x (14.5x previously) to our SOTP earnings component, we raise our fair value from S$3.19 to S$3.66. This places the stock at 16.4x FY11F EPS, above its five-year average PER of 15x but below its peak PER of 21x, which is justifiable in our view. At current price, we maintain our HOLD rating on SIAEC.