SIA Engine / SATS

SIA Engine / SATS: CIMB recommends switch out of SIA Engine into SATs. House downgrade SIA Engine to Neutral from Outperform with unchanged target price, on blended P/E and DCF valuations. Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, still like its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings. Will revisit this stock on margin expansion or stronger-than-expected volume from airframe maintenance. House believe recent share price surge partly due to optimism over Changi’s breakthrough, with 920 flights handled per day, crossing the 900 mark for the first time. However factor in 9% yoy growth in FY13 for SIE’s line maintenance volume, which outpaced the expected growth in capacity expansion in Changi of about 4%. SATS, with stronger earnings growth (3-year CAGR of 10%), could be a cheaper pick at 17x CY13 P/E vs. SIE’s 18x and lower earnings growth. Secondly, SATS has potential for margin expansion if food inflation is kept at bay. Meanwhile, SIE’s margin is trending downwards on the back of higher subcontractor and materials costs. Finally, SATS offers higher share liquidity with a 57% free float vs. SIE’s 20%.