SIA Engineering margins dip, but growth outlook still bright

Steady demand seems locked in for the aircraft maintenace firm as the global air fleet pumps up capacity.

Airline capacity is projected to grow at healthy rates, which will boost demand for SIA Engineering services.

Changi Airport, for instance, has been posting increased commerical aircraft traffic. Airlines are expected to boost their fleet numbers, at least for the next five years, most of which will require services from SIA Engineering. 

Here's more from Maybank Kim Eng:

Margins affected, risks remain. Operating margins have dipped to 11.1% in FY2012 (from 12.3% in FY2011), mainly due to the return of Line Maintenance margins to pre-FY2011 levels of approximately 21%. Amidst margin concerns, we remain mindful that risks still remain in the midst of a delayed recovery in the aviation sector that is currently suffering from headwinds of elevated fuel prices and depressed yields.

Positive MRO trends. Healthy airline capacity growth forecasts (CAGR: 3.2%) and increased commercial aircraft traffic at Changi Airport should continue to support SIE’s steady earnings growth. Management, while reiterating prevailing challenges affecting the aviation industry, also maintains that demand for the Group’s core businesses will remain stable in the near term.

We see that the overall MRO market will be well supported by longer-term aviation capacity growth projections. It has been estimated that the global aircraft fleet could increase at a CAGR of 3.2% over the next five years (2012–2017), driven by production rate increases and the entry of new airframes into the market. With over 80 international airline customers, SIE would be well-positioned to benefit from this development.

Stable dividends a silver lining. SIE is holding a net cash position of almost SGD500m. Its combined cashflow from operations and associates/JVs should also comfortably cover dividend payments for the years ahead and sustain a dividend yield of 6%.