SIA Engineering

SIA Engineering: UOB Kay Hian maintains Sell with $3.80 TP. Note that outperformance is unlikely to be sustained as market is overly optimistic of dividend payout. Note that mkt has not priced in risk of capacity cuts.

Maintenance rev is typically based on flight cycles and as airlines cut capacity due to weak demand, rev would be impacted. SIA which accounts for two-thirds of rev, has already announced freighter capacity cuts. There is also the strong likelihood that passenger capacity growth could be moderated if demand falters.

This can be gleaned from the fact that SIA has already offered its pilots an optional no-pay leave of up to two years. Changi Airport has also just announced landing rebates of 5% for passenger and 20% for cargo aircraft in an attempt to reduce operational costs. In addition, believe that the market has not priced in the risk of lower operating margins.

Overall, do not expect SIAEC to announce a final special div (FY11: special dividend 10c, total div 30c) and instead expect a final payment of 13c, bringing total div to 19c. This represents a payout of 80%. For FY13, expect div payout to remain flat and payout from JVs and associates to normalise to 67% for FY12 and FY13, from an average of 116% for FY10-11.