SIA Engineering: Growth, Challenges, and Future Prospects

Report Date: November 6, 2024

Broker: CGS International

Introduction

SIA Engineering Company (SIE) has displayed promising signs of recovery and growth as highlighted in the latest financial report by CGS International. The report provides a comprehensive analysis of the company’s performance in the first half of the fiscal year ending March 2025 (1HFY25) and outlines the key drivers and challenges that lie ahead. This detailed review covers revenue trends, operational metrics, associate contributions, and strategic initiatives aimed at sustaining growth in the aviation maintenance, repair, and overhaul (MRO) market.

Revenue and Profit Trends

SIA Engineering reported a 12% year-on-year (yoy) growth in revenue for 1HFY25, indicating a robust reacceleration in the second quarter (2Q) with a 22% yoy increase. The company’s net profit for 1HFY25 stood at S\$69 million, reflecting an 18% yoy growth, which aligns with 49% of the full-year forecast for FY25. Despite facing pressures from elevated labor and material costs, the operating profit margin (OPM) showed a slight improvement of 0.6 percentage points yoy.

Operational Performance

The line maintenance segment handled 9% more flights yoy in 1HFY25, nearing pre-COVID-19 levels seen in 1HFY20. However, the number of checks performed by base maintenance declined by 12% yoy, although the scope of work per check increased due to the higher utilization of older aircraft and some cabin refurbishment projects. SIA Engineering is also renegotiating its MRO contract rates with its parent company, Singapore Airlines (SIA), to better align with current market conditions.

Associate Contributions

Associate contributions remain a cornerstone of SIA Engineering’s earnings, accounting for approximately 80% of the company’s net profit for FY25-27F. Both engine associates, ESA and SAESL, exhibited strong work volume recoveries in 1HFY25. ESA benefited from the ramp-up of geared turbofan (GTF) engine recalls and ongoing facility expansions. SAESL reported a robust profit growth of 36% yoy due to higher rates and increased output, with expansion plans set to boost capacity by 40% by 2026/27F.

Strategic Initiatives

SIA Engineering is actively pursuing several long-term growth avenues. Notable initiatives include the launch of Subang base maintenance hangars in the second half of FY25 (2H25F), the introduction of line maintenance services in Cambodia in the first quarter of FY25 (1Q25F), and a collaboration with Air India. These strategic moves are expected to enhance the company’s service offerings and geographic reach.

Financial Metrics and Forecasts

The company’s financial performance is anticipated to improve gradually over the next few years. Core earnings per share (EPS) are projected to grow by 18.7% in FY25, 8.1% in FY26, and 10% in FY27. The dividend per share (DPS) is also expected to rise, offering a yield of 4.42% by FY27. The company’s net profit margin is forecasted to increase, driven by higher operational efficiency and favorable contract renegotiations with SIA.

Risks and Challenges

Despite the positive outlook, SIA Engineering faces several risks and challenges. Elevated labor and material costs continue to pressure margins. Additionally, potential economic slowdowns could impact MRO volumes, while prolonged margin pressures remain a concern. The company must navigate these challenges carefully to sustain its growth trajectory.

Conclusion

In conclusion, SIA Engineering is well-positioned to capitalize on the rising demand for MRO services in the region. The company’s strategic initiatives, coupled with strong associate contributions, are expected to drive growth in the coming years. However, it must address cost pressures and economic uncertainties to maintain its competitive edge in the aviation sector.

Broker Recommendation

CGS International maintains an “Add” rating for SIA Engineering with a target price of S\$2.65, reflecting a 6.4% upside from the current price of S\$2.49. The recommendation is based on the company’s strong fundamentals, growth prospects, and strategic initiatives aimed at enhancing its market position.