• SIAEC’s valuation is more palatable at 18x CY19F P/E, -1 s.d. of its 7-year mean (23x).
• We lift FY19-20F EPS by 19-20% to factor in higher contributions from JV/associates as problematic Trent 1000 Rolls Royce engines continue to drive engine repair.
• SIAEC is cash rich with net cash of S$500m (S$0.44/share); this should sustain a DPS of S$0.13-0.14, translating into a dividend yield of 4-5%.
• With our EPS upgrade, our Target Price is raised to S$3.31, still based on DCF. At our target price, the stock would be trading at 21x CY19F P/E or -0.5 s.d. from mean.

Valuation More Palatable at -1 S.d. of 7-year Mean; Limited Downside

We think the 22% decline in share price over the past 12 months has been due to SIAEC’s exclusion from the STI index since Aug 17 amid structural challenges in airframe MRO. Now at 18x CY19F P/E, however, below its 7-year mean of 23x, SIAEC is more palatable. We also note that the valuation gap between SIAEC and STE narrowed to 0% from an average of 30% in the past 3 years. We believe EPS growth of 6% could limit downside.

Source: CGS-CIMB Research - 31 Jul 2018