Monday, June 1, 2009

SIA Engineering - Buy by DBS Vickers (01 Jun 09)

Inspires confidence
• Structural changes in industry should boost line maintenance operations
• Niche product offerings and associate/ JVs will help SIE minimise the pain of downturn
• Market yet to fully price in SIE’s potential to lead a broad-based economic recovery
• Maintain BUY, TP S$3.20

Management remains confident of leading the recovery. We hosted senior management of SIE – including Mr. William Tan (President & CEO) and Ms. Anne Ang (CFO) –for a luncheon meeting, which was very well received by the investment community. On the heels of the recent announcement regarding pay cuts for management – signaling stricter cost management measures, Mr. Tan assured investors that they had the business model in place to withstand the challenging conditions in the near term and still be among the earliest to recover during a demand upturn.

And the downturn may not be too bad either. We believe earnings decline in FY10 will not be as bad as the 32% decline during SARS-affected FY04 owing to i) new hangar capacity coming online in 2H10 ii) additional capacity in key JV SAESL, which should offset to an extent any possible decline in overall associate/ JV contributions and iii) recurrent revenue from pay-by-thehour fleet management contracts.

Still time to cash in on the upside. We feel that SIE, along with its JVs/associates, has the ability to boost its MRO market share and could demonstrate a steady growth trajectory, once the drop in demand caused by the aviation downturn has passed. Meanwhile, healthy upstream dividends from associates/ JVs should fortify SIE’s dividend payout potential. Our target price of S$3.20 still implies a potential upside of 23%, and dividend yield is close to 6%. Maintain BUY.

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