3 reasons why SIA Engineering is threatened by SATS

The latter's profit growth is stronger.

According to CIMB, SIA Eng’s share price has outperformed the index by 33% since Jan 12 and now trades close to its historical peak. The firm recommends switching to SATS to take advantage of the capacity growth in Changi Airport, with easing food inflation being an additional catalyst.

Its 13% YTD surge leaves it vulnerable to profit taking as early year optimism dwindles. However, CIMB still likes its decent dividend yield of 4.3% and 7.8% 3-year CAGR in earnings.

Here's more from CIMB:

We believe the recent share price surge is partly due to optimism over Changi’s breakthrough, with an average of 920 flights handled per day, crossing the 900 mark for the first time.

However we have factored 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%.

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