• FY14 results in-line
• Modest gain from regional airlines’ capacity growth
• Maintain HOLD

FY14 results within expectations

SIA Engineering Company's (SIAEC) FY14 results were within expectations. FY14 revenue increased 2.7% to S$1.18b, forming 101.4% of our forecast. However, lower margins resulted in PATMI declining 1.6% to S$266m, making up 99.1% of our forecast. The S$44.0m increase in expenditure (+4.3%) came mainly from higher staff costs, sub-contracting and material costs. This is partly compensated by associates’ and JVs’ share of profits increasing steadily by 8.3% to S$162.6m, representing 61% of the SIAEC’s net profit. The main contributors were the engine repair and overhaul centres which accounted for S$125.0m. A final ordinary and special dividend of 13 S-cents and 5 S-cents respectively were recommended, bringing full-year dividend to 25 S-cents.

Modest upside from high capacity growth in Asian airlines

Though Asian airlines are adding capacity aggressively, bulk of the capacity growth is in the low cost carrier (LCC) segment. According to CAPA, APAC LCCs aircraft order book is 2.4x of current fleet as of Dec-13. As LCCs typically use older aircraft models with minimal cabin works, there is less earnings from MRO per aircraft. The tight operating budgets of LCCs also mean they are more likely to choose other lower-cost sites nearby for MRO even if the turnaround time is higher. Hence, we see modest upside and think SIAEC’s outlook will continue to be stable.

Philippines’ third hangar to start operations in Jun-14

Management guided that the third hangar at Clark base (Philippines) is expected to come on-stream in Jun-14. With this new hangar, Clark base’s capacity is expected to double. As the two existing Clark base hangars are already fully utilised, we expect the third hangar to start contributing to earnings in 2HFY15.

Maintain HOLD

Incorporating the latest results, we maintain a HOLD rating on SIAEC but raise our FV slightly from S$4.77 to S$4.83 based on 19.0x FY15 EPS of 25.4 S-cents (previous: 25.1 S-cents). Assuming a 90% payout ratio (vs. three-year historical average of 93.5%), we expect FY15F dividend yield to be reasonably attractive at 4.7%.

Source: OCBC Research - 7 May 2014