By Kevin Tan
Mon, 26 Jul 2010, 09:24:13 SGT

SIA Engineering Company’s (SIAEC) 1QFY11 results were within market and our expectations. Revenue came in at S$288.3m (+18.1% YoY, +5.8% QoQ), forming 26.1% of our FY11 revenue forecast (26.3% of consensus), while PATMI hit S$70.8m (+57.0% YoY, -4.2% QoQ), representing 28.2% of our earnings projection (27.4% of consensus). With the recovery of the aviation industry in sight, management guided that SIAEC is likely to benefit from increased maintenance, repair and overhaul (MRO) business amid growth of traffic at Changi Airport and higher utilization of aircrafts by its customers. In addition, its JVs have started to recover, albeit at a more gradual pace. As the quarterly results were consistent with our expectations, we are holding our FY11 forecasts and SOTP fair value estimate of S$3.85. While we are positive on SIAEC’s strong financial performance and business prospects, we believe that upside is limited at current price level. As such, we maintain our HOLD rating on SIAEC.

Within expectations. SIA Engineering Company’s (SIAEC) 1QFY11 results were within market and our expectations. Revenue came in at S$288.3m (+18.1% YoY, +5.8% QoQ), forming 26.1% of our FY11 revenue forecast (26.3% of consensus), while PATMI hit S$70.8m (+57.0% YoY, -4.2% QoQ), representing 28.2% of our earnings projection (27.4% of consensus). The topline growth was due to airframe maintenance and component overhaul work and fleet management revenue, whereas the stronger PATMI growth was driven by higher revenue, relatively slower increase in expenditure (+8.7% YoY) and higher share of profits from its JV and associated companies (10.1% YoY). The group ended the quarter with no borrowings and a strong cash balance of S$531.0m, up 24.7% from S$425.8m as of 31 Mar.

Expecting favourable impact from aviation industry recovery. With the recovery of the aviation industry in sight, management guided that SIAEC is likely to benefit from increased maintenance, repair and overhaul (MRO) business amid growth of traffic at Changi Airport and higher utilization of aircrafts by its customers. In addition, its JVs have started to recover, albeit at a more gradual pace. We note that the International Air Transport Association (IATA) had significantly upgraded its 2010 global aviation industry forecasts in Jun (expecting US$2.5b profit now as compared to US$2.8b loss in its Mar forecast), citing faster-than-anticipated recovery in the global economy and a strong rebound in air traffic. We also understand that results from IATA’s quarterly survey in July showed a further improvement in airline business confidence, suggesting that airlines anticipate a significant improvement in profitability in 2010. We see these developments as being consistent with our view, and we expect this positive outlook to bring about a continued demand for SIAEC’s services.

Final bids for third ground-handling license announced. We also note that the Changi Airport Group had recently launched the second stage of a two-phase tender process for a third ground-handling license at Singapore Changi Airport, and had invited four companies, including SIAEC, to submit detailed bids for this purpose. If SIAEC is successful in securing the license, it would provide the group with another leg of growth as early as 4QFY11.

Maintain HOLD on valuation grounds. Nevertheless, pending the outcome of the bid, we are holding our FY11 forecasts and fair value of S$3.85, as the quarterly results were consistent with our expectations. While we are positive on SIAEC’s strong financial performance and business prospects, we believe that upside is limited at current price level. Maintain HOLD.