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Fitter Cathay could prompt HAECO switch

GIVEN a significant premium performance against its parent Cathay Pacific and the stock market, it is perhaps time shareholders of Hong Kong Aircraft Engineering Company (HAECO) should consider switching into a recovering Cathay.

HAECO's recent 1993 results were in line with forecasts and give an indication of its future prospects. Net profits were $447 million, up 15.2 per cent against $388 million in 1992, giving earnings per share of $2.41 and a dividend of $1.01.

HAECO has been tight-lipped on its ultimate relocation to Chek Lap Kok, only saying that discussions with the Provisional Airport Authority are continuing. But uncertainty over the airport negotiations should not affect earnings growth in the foreseeablefuture. Schroders Securities predicts a marginal improvement in net profit growth of 15.7 per cent in 1994 and earnings per share of $2.79, on the back of further cost control and continuing high capacity utilisation.

This will put the stock on a prospective price-earnings multiple of 15.7, a slight discount to the market. However, following a strong relative performance last year, Schroders feels the stock may have a more pedestrian 1994 and believes an alternative would be to switch into its parent.

With a monopoly on aircraft repair at Kai Tak Airport, the company benefited directly from the 12.2 per cent increase in aircraft movements. Tough cost controls and improved productivity helped take margins up 22.8 per cent from 21.9 per cent in 1992. The company expects to handle an increasing proportion of movements this year.

HAECO's heavy maintenance capacity was well used last year by both its major customers, Cathay and Dragonair, and other airlines. Cathay took delivery of four new aircraft during the year and also required heavy maintenance and modification work on five TriStars. The next four years will see great change in Cathay's fleet composition with the phasing out of TriStars and replacement with Airbus A340s and A330s. This year will also see the winding down of the TriStar fleet which should bring significant phase-out check business to HAECO.

Meanwhile, Dragonair is also expected to switch from 737s to A320s in 1994, providing HAECO with more pre-service work.