Pressures build up on SIA Engineering as flight traffic tumbles 2.6% in FY14

Disappointments are up ahead.

The aviation sector is losing wind as developments turn in the negative.

Airline capacity at Changi Airport continued to soften, with flight traffic down 2.6% YoY in
July. As airline capacity changes are good leading indicators of MRO demand, we see intensifying pressure on SIAEC’s business.

A report by Maybank Kim Eng indicates that amid regional overcapacity, airlines are unlikely to add meaningful capacity. Furthermore, unlike the opening of integrated resorts in early 2010 that powered a post-GFC traffic recovery, no similar impetus is on the horizon this time around.

Maybank Kim Eng adds that Khazanah recently highlighted that Malaysia Airlines (MAS) will rationalise its network to focus on regional routes. The airline will reconfigure its fleet accordingly. This could mean an accelerated retirement of its B777s, used primarily on long-haul routes. If so, SAESL’s workload could be affected, as it is the engine shop for these aircraft.

Despite the above negative developments, the stock has bounced off its recent low of SGD4.51, now trading at 22x FY3/15E P/E. This is not justified, in Maybank Kim Eng’s view.

According to the bank, the market has not priced in its impending slowdown, with the spectre of earnings disappointments ahead. Maintain SELL and TP of SGD4.20, set at20x FY3/15E P/E, 1 SD above its 10-year average.