HAECO to acquire TIMCO for USD388.8m. Hong Kong Aircraft Engineering Company (HAECO) announced the acquisition of TIMCO for USD388.8m (c.HKD3,025m). Based in the United States (US), privately held TIMCO is one of the largest providers of maintenance, repair and overhaul (MRO) services in the world with over 2,700 employees. TIMCO provides line maintenance at 16 airports, engine repair and overhaul services at Michigan and airframe maintenance work in North Carolina, Florida, Georgia and Ohio. This acquisition would allow HAECO to extend beyond its primary area of operations in Hong Kong and China.

Merger of the second and seventh largest global players. According to a recent survey by the Overhaul and Maintenance magazine, HAECO and TIMCO are the second and seventh largest MRO companies in the world by airframe man-hours clocked in 2012. The combined airframe maintenance output for these two entities of 10.6m man-hours would allow them to close in on global leader ST Engineering, which recorded 11.5m man-hours in the year.

Singapore MROs at discount to TIMCO’s valuation. While all MROs are not directly comparable, we opine that the acquisition valuations for TIMCO will provide a reference multiple for the publicly-listed MROs and believe that the sector should trade up to comparable valuations. As the capital structure of privately held TIMCO is not disclosed, we believe that P/E valuation will be the primary basis for comparison. As shown in Figure 2, the Singapore-based MRO players currently trade at a discount to TIMCO’s target P/E and could re-rate to comparable multiples (SIAEC: 15%, STE: 8%).

Reiterate BUY on SIAEC and STE. We reiterate our positive views on the Singapore MROs and believe that they are good proxies to the structural growth in global air traffic. We value SIAEC at SGD6.19 using the SOTP methodology as we believe it better reflects the underlying value of the group’s associates and JVs. Almost half of our valuation of the stock resides in the group’s key JVs with Rolls-Royce (SAESL + IECO), reflecting the positive outlook and strong economic moats of their businesses. We value STE using 23x FY13/14F PER to derive our TP of SGD4.80. The peg to the near historical peak PER reflects our positive view on the company, which is underpinned by the strong order book of SGD12.7b (2x annual sales).  

Source: Maybank Kim Eng Research - 25 Oct 2013