Aviation Singapore - UOB Kay Hian 2017-06-06: SIAEC’s Share Buybacks Likely To Support Share Price But Industry Faces Macro Headwinds

Aviation – Singapore - UOB Kay Hian 2017-06-06: SIAEC’s Share Buybacks Likely To Support Share Price But Industry Faces Macro Headwinds Singapore Aviation Sector Outlook 2017 SIA ENGINEERING CO LTD S59.SI SINGAPORE TECH ENGINEERING LTD S63.SI

Aviation – Singapore - SIAEC’s Share Buybacks Likely To Support Share Price But Industry Faces Macro Headwinds

  • SIA Engineering (SIAEC)’s relative strength is due to its ongoing share buybacks, which we believe will continue until at least year-end as a large number of money stock options are slated to expire in the next 12 months. 
  • However, SIAEC trades at a relatively high valuation and the street has not factored in the substantial competition that SIAEC and ST Aerospace (wholly owned by ST Engineering) face from expanded hangar capacity and alliance in the region. 
  • Maintain MARKET WEIGHT.



WHAT’S NEW

  • SIA Engineering’s (SIAEC) daily share buybacks support stock price. To-date, the company has purchased almost 688,000 shares at about an average of S$3.88.
  • Collectively, SIAEC accounts for about 15% of market volume and we believe this will provide price support to the stock. As at end-FY17, SIAEC had S$602m cash and has a mandate to purchase an additional 3.9m shares, which could increase. 
  • We believe SIAEC will continue to repurchase shares as 4.465m (0.4% of outstanding shares) employee stock options at an exercise price of S$3.59 will expire by end-Jun 18. Odds of these options being exercised are high, given that they are in the money.

SIAEC’s new line maintenance operations at Kansai airport will not be a game changer. 

  • The airport serves 78 airlines from 23 countries. However, we believe SIAEC’s line maintenance, which generally involves personnel posted to the site, will primarily serve SIA group of airlines, which collectively has 20 weekly flights. 
  • For comparison, SIAEC performed line checks on 141,000 aircraft in FY17.

ST Aerospace ranks as top in MRO (maintenance, repair and overhaul) in manhours terms but competition is heating up. 

  • ST Aerospace (wholly owned by ST Engineering), while being the largest operator, lags behind European MRO operators, Lufthansa Technic and AFI KLM in revenue terms, due to higher engine and line component revenue. 
  • While there has been a spate of M&A out of North America ( MRO Holdings and Aeroman and Flightstar Aircraft services) and Europe (ST Aerospace and EFW (Airbus’s MRO and conversion arm), the Asia Pacific region has yet to see meaningful consolidation. In fact, hangar capacity has been rising, particularly out of Indonesia and Philippines, both relatively low cost centres. 
  • The region could see more alliances with European MRO operators as evidenced by Lufthansa Technic’s MOU for airframe and engine component JV with Garuda Indonesia’s GMF AeroAsia. The latter is also building a 25,000sf hangar facility at Batam. This will pose a direct threat to Singapore’s leading MRO providers. 
  • Thailand has also announced plans to boost its MRO capability by inviting companies to set up operations, while Thai Technical, the MRO arm of Thai Airways is mulling a JV with a top-tier MRO operator.


ESSENTIALS


SIAEC still a SELL on longer-term basis. 

  • SIAEC’s share price was supported earlier by expectations of a bumper special dividend payout and presently by share buybacks. However, the primary earnings driver over the past three years has been line maintenance, which is unlikely to grow materially as airlines are scaling back capacity additions. 
  • Longer term, SIAEC faces competition from regional lower-cost MROs.
  • Valuations are rich, with SIAEC trading at 26x FY18F PE, comparatively higher than its peers’ average. Even HAECO, which is the largest MRO by total manhours, trades at a lower trailing ex-EI PE of 17.3x.

ST Engineering’s (STE) aerospace will not be immune to rising competition.

  • Revenue out of Asia, which amounted to 75% of total revenue in 2015, fell 4% yoy in 2016, underscoring heavy competition in the region. 
  • To its credit, STE has diversified its operations by expanding in Europe via the purchase of EFW and doubling hangar capacity in Guangzhou. 
  • We still like STE for its long-term growth prospects from its diversified business operations, its relatively asset-light model and high ROE. However, we continue to rate the stock a HOLD with a target price of S$3.90 and will be buyers near S$3.60.


CATALYSTS

  • None.


EARNINGS REVISION/RISK

  • None.







K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-06
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.500 Same 3.500
HOLD Maintain HOLD 3.900 Same 3.900



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