VietJetAir to expand A320 fleet, boon for SIAEC’s FMP service. VietJetAir, a Vietnam-based low-cost carrier, announced recently that it has signed a memorandum of understanding with Airbus for up to 92 A320s (42 A320neo, 14 A320ceo, six A321ceo and 30 purchase rights). It also said it will lease another eight A320s from third-party lessors. This means there is scope for SIAEC to extend the service contract under its Fleet Management Programme (FMP) to the future fleet of A320s, given that VietJetAir is an existing customer. The A320 family of aircraft forms the bulk of the fleet under its management and we believe this business segment will benefit from  economies of scale as its customers continue to expand their fleet.

Changi Airport traffic growing from strength to strength. A total of 29,600 landings and take-offs were recorded at Changi Airport in Aug 2013, up 8.2% YoY. The increase was driven by a sustained uptrend in traffic growth momentum over the past few months. Longer term, traffic growth at the airport will remain highly visible as Singapore aims to double its terminal handling capacity by mid-2020s. As a dominant player at Changi Airport, we expect this development will keep SIAEC’s line maintenance division highly profitable.

Cash pile too high; time to review conservative capital structure? Over the past two years, we note that SIAEC has been hoarding cash and  believe that it  should  increase its dividend distribution to shareholders. While the SIA Group has little problem funding the huge aircraft orders placed over the past year, we think SIAEC should return the excess cash to its parent company, which can then be redeployed to fund these future capital expenditure. In other words, perhaps the time is ripe for SIAEC to conduct a radical review of its conservative balance sheet and consider a more aggressive capital structure.

Top pick in the sector,  reiterate BUY.  SIAEC is our top pick in Singapore’s Transportation space as it is a pure play to the aviation growth story in the region (click for sector note). Reiterate BUY with TP of SGD6.19.

Source: Maybank Kim Eng Research - 7 Oct 2013