3Q results slightly below, downgrade to HOLD (Target price: SGD4.86) on valuations. SIA Engineering (SIE) reported 3QFY3/13 results that were slightly below our expectations as 9MFY3/13 PATMI of SGD204.2m comprised only 72% of our full-year estimates. With the recent price surge coinciding with our upgrade report barely two months ago, we believe that SIE is fairly valued at this level, pricing in the expected steady growth within the aviation MRO sector. We trim our forecasts and Target Price by ~2% and downgrade SIE to a HOLD: yields of 4.6% remain decent.

Weaker revenue, but costs controlled well. SIE reported 3QFY3/13 revenues which were 8% weaker YoY on lower fleet management and project revenue, but credible cost control enabled expenditure to fall by an even larger margin of 10.2% YoY, contributing to an overall operating profit which rose 10% YoY. Associates and JVs share of profits were largely flat, which translated to a 5.5% increase in PATMI. Management’s outlook on 4Q was stable, in line with our steady growth forecasts for the company going forward.

Sharp ascent = in-specie dividend from SIA? With the recent sharp rise in SIE’s share price, we highlight the possibility of parent SIA taking advantage of the situation to issue SIE shares as in-specie dividends. We remind investors that SIA is no stranger to such a distribution (SATS in 2009), and more recently Keppel Corp announced the issuance of K-REIT shares as part of its dividend package to investors. Should SIE’s share price experience short-term weakness upon such an announcement, this could present an opportunistic entry point.

Downgrade to HOLD, watch for re-entry at SGD4.50. We downgrade SIE to a HOLD, premised on attaining fair value at current levels pegged to 18.3x FY3/14 PER (1 SD above its historical mean). While existing investors can continue to enjoy yields of ~4.6%, we advise investors to watch for any potential re-entry opportunities at ~SGD4.50 which could materialise should SIA decide to distribute SIE shares as in-specie dividends.

Source: Maybank Kim Eng Research - 06 Feb 2013