SIA Engineering Co., Asia’s second-largest aircraft maintenance company, is set to gain from a travel boom in the region, according to Maybank Kim Eng Holdings Ltd. and Samsung Asset Management.
Net income at the unit of Singapore Airlines Ltd., Asia’s second-biggest carrier by value, will increase by an average of 6.4 percent annually over the next three years through March 2016, according to analyst estimates compiled by Bloomberg. SIA Engineering has climbed 13 percent this year, the second-biggest advance on the benchmark Straits Times Index.
Carriers from Asia-Pacific, the world’s biggest aviation market, will lead orders for new aircraft, Airbus SAS Chief Operating Officer John Leahy said in February. The region will add about 380 million travelers between 2012 and 2016 to 1.2 billion, the International Air Transport Association has said.
“SIA Engineering is benefiting from industry growth driven by airlines expanding their fleet,” said Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management, which oversees more than $100 billion globally. “The company has a competitive advantage, stable track record and good dividend return.”
SIA Engineering will probably boost its aircraft engine overhaul capacity to meet the rising demand, according to Maybank Kim Eng.
Airlines in the Asia-Pacific region may order 12,820 aircraft by 2032 to cater to increasing demand, according to Boeing Co.’s estimate. Carriers from AirAsia Bhd., Asia’s biggest budget airline, to Tiger Airways Holdings Ltd. ordered at least 1,000 new planes in the past five years. About 15 low-cost carriers started flying in the past decade in the region.
“Low-cost carriers generally outsource the maintenance,” said Brendan Sobie, analyst at Sydney-based Centre for Aviation. “They don’t have their own heavy maintenance capabilities. Obviously there continues to be a lot of opportunities for maintenance companies in Asia as the fleet expands, especially in the medium to long-term.”
SIA Engineering won contracts last year from Vietnam’s VietJet Air as well as Cebu Air Inc., the Philippines’ biggest budget carrier. Singapore Airlines still accounts for about 63 percent of its revenue, it said.
“I like the company as a play on growing air traffic in Asia,” Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom report, said in an e-mailed response to queries. “I have owned the stock for years.”
Chia Peck Yong, a spokesman for SIA Engineering, declined to comment on the company’s prospects or expansion plans before the release of the quarterly results on July 22.
The plane orders may not immediately boost SIA Engineering’s business as airlines are unlikely to send their newer aircraft for frequent maintenance check-ups, said Kenneth Ng, head of research at CIMB Group Holdings Bhd. in Singapore.
“The main grouse we have is valuation,” said Ng, whose brokerage rates the stock neutral. “We don’t think SIA Engineering will continue to outperform the market.”
SIA Engineering rallied 21 percent in the past 12 months, boosting the stock’s valuation to 19 times estimated earnings, compared with the average of 15 times in the past five years. Singapore Technologies Engineering Ltd., Asia’s largest aircraft maintenance company that has climbed 29 percent, trades at 20 times. The multiple for the Straits Times Index is 14 times.
SIA Engineering “remains undervalued,” said Derrick Heng, an analyst at Maybank Kim Eng. “We expect the market to eventually appreciate the strength in its joint ventures.”
Singapore Aero Engine Services Pte., a joint venture between SIA Engineering, Rolls-Royce Holdings Plc and Hong Kong Aero Engine Services Ltd., may see increased orders from Singapore Airlines and other customers utilizing Rolls-Royce Trent engines, Heng wrote in a June 20 report.
There’s “hidden value” in the joint venture as it will probably increase its capacity to serve engine maintenance requirements of carriers including AirAsia, Malaysian Airline System Bhd., Thai Airways International Plc and Virgin Atlantic Airways Ltd., according to Maybank Kim Eng.
SIA Engineering is building a third hangar for wide-body aircraft at its maintenance facility at Clark International Airport, a former U.S. airbase situated north of the Philippine capital of Manila, Chairman Stephen Lee said in the company’s latest annual report.
Apart from its growth prospects, SIA Engineering also paid out a dividend of S$243 million ($191 million) in the year ended March 2013, equivalent to about 90 percent of its profit, according to the annual report.
SIA Engineering offers investors a dividend yield of 4.4 percent, compared with 3.1 percent for the Straits Times Index and 2.6 percent for 10-year Singapore government bonds, according to data compiled by Bloomberg.
“We expect increasing dividends from the company, given its strong free cash flow generation,” said Heng at Maybank Kim Eng.