Maintain BUY, TP: SGD6.34. We remain positive on SIAEC and raised our estimates by 2%-4% over FY14-16, mainly to account for better-than-expected performance from its associates. SIAEC is a key beneficiary of plans to double Changi Airport’s capacity over the next decade and is our top pick in the Singapore Transportation space. We maintain our BUY rating and raised our TP to SGD6.34.

SAESL & IECO continue to shine. The combined earnings from SAESL & IECO increased by 13% YoY for 1HFY03/14 (34% of PBT) due to growing demand for maintenance work with the influx of Trent engines into the region. The outlook for these units is highly visible given the huge aircraft orders for Trent engines (Fleet: 324, Order: 416). These two units will continue to be a key profit driver and account for half of our valuation for the stock.

Contributions from associates beat expectations. We are positively surprised by the strong associate contributions for 1HFY03/14 (+30% YoY, 25% of PBT), lifted by the Line & Component cluster. The Pratt & Whitney related companies, which provides the engine & engine part repair & overhaul services, reversed the decline in earnings over the past year to report higher contributions for 1HFY03/14 (+21% YoY).

Offset soft performance at core Line, Repair & Overhaul business. Performance for the core Line Maintenance, Repair and Overhaul business of the company was fairly soft with operating profits declining 14% YoY for 1HFY03/14, largely due to a 5.5% YoY increase in staff cost. While labour-induced margin pressure persisted, the long-term outlook for this business remains bright, in our view. The plan to double Changi Airport’s capacity over the next decade will increase workloads for MRO companies based in Singapore. As a dominant player in the Line Maintenance market, SIAEC is a direct proxy to this trend. The expansion into the Philippines will increase SIAEC’s competitiveness by tapping into cheaper source of labour.

Source: Maybank Kim Eng Research - 11 Nov 2013