KEEP YOUR SEATBELTS FASTENED
Things should be more exciting hereon.
- The share price underperformance in recent months looks to have largely priced in the weak earnings performance in recent quarters.
- We believe it could be time to watch out for signs of operational improvement as well any potential corporate activity triggered by the decline in share price.
Structural headwinds posing challenges.
- Despite overall steady growth trends in MRO industry, SIE’s heavy maintenance business has been affected by the induction of newer aircraft, especially in parent SIA’s fleet.
- Newer aircraft are increasingly more reliable, with longer maintenance cycles.
- Concurrently, SIE’s engine MRO JVs are also facing the reality of older engine models being retired on an accelerated basis, and new models requiring fewer shop visits.
Is consolidation the way out?
- In order to tackle some of the structural issues, SIE may consider merging with or partnering third-party MROs with complementary business models.
- Given its share price decline in recent months, valuations are more amenable to a merger or takeover situation.
- We believe the merits of a combination of SIA Engineering and ST Aerospace will better consolidate Singapore’s credentials as an aviation hub as synergies are realised in the form of bigger scale, cost efficiencies and breadth of offerings.
Valuation:
- Given the steep 26% fall in share price since our downgrade last November, we believe downside is limited at these levels.
- Upgrade to HOLD on the back of dividend yield support ( > 4%) and potential M&A activity.
- Our TP of S$3.70 is based on a blended valuation framework (PE, dividend yield and DCF).
Key Risks to Our View:
- OEMs getting more aggressive. As OEMs increasingly take a bigger share of the airframe MRO market for new generation aircraft, SIE will need to adapt and stay relevant by forming JVs with the right OEMs in the right market, in order to secure future workload.
- However, new ventures will take time to ramp up and share of market could effectively be lower.
Analyst: Suvro SARKAR
Source: http://www.dbsvickers.com/
