20140312-Maybank_KERPL-HAECO_44.HK_PAUSE_IN_GROWTH__BUY_HKD110_44_HK_AVIATION__13页_619kb

HAECO (44 HK) Summary

Core Content

HAECO, a Hong Kong-based aviation MRO (Maintenance, Repair, and Overhaul) provider, reported a net income of HKD625 million for FY13, which fell short of expectations due to several factors. The company's share price is currently HKD94.95, with a target price of HKD110.00, representing a 16% increase. The market capitalization is USD2.0B, and the average daily trading volume is USD0.2M.

Main Points

• Earnings Miss in FY13: The net income for FY13 dropped by 24% YoY, primarily due to margin pressures from labor-related issues, weaker performance at HAESL, and a one-off acquisition-related cost of HKD60 million for TIMCO.
• Segmental Performance:
  • HAECO: Suffered from labor shortages, leading to a decline in output.
  • TAECO: Showed a positive trend with 11.5% YoY revenue growth.
  • TEXL: Surpassed expectations with a 269.5% YoY increase in revenue, indicating strong performance in engine maintenance.
• Outlook for 2014: The outlook remains challenging due to the early retirement of B747 aircraft and improved reliability of the Trent 700 engines, which reduced the workload at HAESL.
• Future Projections:
  • The company trimmed its FY14E–FY16E earnings forecast by 12–19%.
  • The medium-term earnings growth is expected to be significant with a 22% CAGR from 2013 to 2016.
  • The valuation target was adjusted to 23x FY14E P/E, resulting in a lower target price of HKD110 (from HKD128 previously).
• Key Financial Metrics:
  • Revenue is projected to grow from HKD7,387 million in FY13 to HKD13,086 million in FY16.
  • EBITDA is expected to increase from HKD754 million in FY13 to HKD1,586 million in FY16.
  • Net income is forecasted to rise from HKD625 million in FY13 to HKD1,124 million in FY16.
  • Core EPS is projected to grow from HKD3.76 in FY13 to HKD6.76 in FY16.
• Dividend Yield: The net dividend yield is expected to increase from 2.2% in FY13 to 3.9% in FY16.
• Valuation Comparison: HAECO is considered undemanding relative to its trading history, with a lower EV/EBITDA multiple compared to previous years.
• Group Synergies: TIMCO is expected to contribute positively to earnings, with some spare capacity and potential for synergies.
• Investment in China: The establishment of a new Component and Avionics Shop in Xiamen highlights the company's concern over labor shortages in Hong Kong.

Key Figures

Summary of Key Takeaways

• HAESL: Experienced a sharp 11.8% YoY drop in contributions due to the early retirement of B747 aircraft and improved Trent 700 engine reliability, which reduced shop visits. However, the long-term outlook remains positive due to its niche service offering.
• TEXL: Demonstrated strong performance with a significant increase in engine output, contributing positively to the company's earnings.
• TIMCO: Expected to be an earnings-accretive acquisition, with potential for synergies.
• Labour Shortage: Continues to be a challenge, particularly in Hong Kong, affecting HAECO's heavy maintenance output.
• Valuation: Despite the earnings miss, HAECO is viewed as undervalued relative to its historical performance, with a target price of HKD110, reflecting its superior earnings growth expectations.

Research Contacts

• REGIONAL:
  • WONG Chew Hann, CA - Regional Head of Institutional Research
  • ONG Seng Yeow - Regional Head of Retail Research
  • Alexander GARTHOFF - Institutional Product Manager
• ECONOMICS:
  • Suhaimi ILIAS - Chief Economist (Singapore | Malaysia)
  • Luz LORENZO - Philippines
  • Tim LEELAHAPHAN - Thailand
  • JUNIMAN - Chief Economist, BII (Indonesia)
  • Josua PARDEDE - Economist / Industry Analyst, BII (Indonesia)
• MALAYSIA:
  • WONG Chew Hann, CA - Head of Research
  • Desmond CH'NG, ACA - Banking & Finance
  • LIAW Thong Jung - Oil & Gas - Regional • Shipping
  • ONG Chee Ting, CA - Plantations - Regional
  • Mohsin AZIZ - Aviation - Regional - Petrochem
  • YIN Shao Yang, CPA - Gaming - Regional - Media
  • TAN Chi Wei, CFA - Power Telcos
  • WONG Wei Sum, CFA - Property & REITs
  • LEE Yen Ling - Building Materials • Glove Producers

Conclusion

Despite the near-term challenges and earnings miss in FY13, HAECO's long-term growth prospects remain strong, supported by its solid business model and the potential for recovery in HAESL and continued strong performance in TEXL. The company's valuation is considered attractive, with a target price of HKD110, reflecting a 23x FY14E P/E ratio. The research team continues to maintain a BUY recommendation for HAECO.