CGS International

May 14, 2025

SIA Engineering: Building Capacity for Long-Term Growth

SIA Engineering (SIE) FY3/25 Core Net Profit Analysis

• FY3/25 core net profit of S\$140.2m was 2.6% below forecast, mainly due to unfavorable deviations in interest income and tax expense [[1]].
• Underlying operating profit and share of profits from associates and JV for FY25 were in line or better than expected [[1]].
• Reiterate Add with higher end-CY25F TP of S\$2.70 as valuations roll forward, still based on CY26F P/E of 19.5x (0.5 s.d. below 2010-19 mean) [[1]].

Stronger FY25 Performance

• SIE’s core net profit of S\$71m in 2HFY25 was 17.8% higher year-over-year (yoy) [[1]].
• This increase was driven by higher line maintenance volumes as airline customers increased flights and a rise in heavy base maintenance checks for SIA’s legacy A380 fleet [[1]].
• Losses at the company level narrowed yoy in SIE’s engine and component businesses due to more engine inductions, while the share of associate and JV profits rose yoy due to higher work volumes [[1]].
• FY25 core net profit of S\$140m was 17.4% higher yoy [[1]].
• A final DPS of 7 Scts was declared, on top of the 2 Scts interim DPS, totaling 9 Scts DPS, representing a payout ratio of 72%, slightly lower than the 75% for FY24 (8 Scts total DPS) [[1]].
• Dividend payouts in the past two financial years were accelerated to make up for the non-payment of dividends during FY21-22 [[1]].

Rationale for Add Rating on SIE

• Renewal of SIE’s line and base maintenance contracts with its parent company SIA from 1 Apr 2025 is a significant potential share price rerating catalyst; details have not been disclosed [[1]].
• An uplift in pricing has been assumed to factor in cost escalation encountered by SIE since the last signing [[1]].
• SIA accounted for 78% of SIE’s company-level revenue, and an estimated c.20% to the revenue of SIE’s associate and JV companies [[1]].

Downside Risks

• Set-up costs for upcoming ventures overseas pose downside risks [[1]].
• SIE is setting up a new line maintenance business in Cambodia, operational from Jul 2025F [[1]].
• Additional base maintenance hangar capacity in Subang by 2HCY25F to target the widebody business and hangar facilities with Air India in Bangalore by CY26F [[1]].
• A new outfit at Shah Alam is intended to be partially operational this year on the component side [[1]].
• The SAESL JV started its 2-year capacity expansion project from Jan 2025 [[1]].
• Manpower and training costs are expected to be incurred in advance of the facilities’ openings, which will be expensed into the P&L and likely continue for 1-2 years into the ramp-up period [[1]].

Reasons to Reiterate Add Call

• The above ventures are building blocks for SIE’s long-term growth, given the current strong demand for MRO services [[1]].
• SIE is progressively rolling out an Enterprise Operating System (EOS) to squeeze efficiencies from its Singapore hangars [[1]].
• Staff costs are likely to be stable going forward, while subcontract costs will remain fixed for FY26-27F [[1]].

Key Changes in This Note

• FY26-27F core EPS forecasts reduced 2-7% as we factor in more modest earnings growth due to set-up costs for the new line and base maintenance ventures overseas [[1]].
• FY28F core EPS forecast introduced in this report [[1]].

Stock Details

• Current Price: S\$2.32 [[1]]
• Target Price: S\$2.70 [[1]]
• Previous Target: S\$2.65 [[1]]
• Up/downside: 16.4% [[1]]
• CGSI / Consensus: 3.8% [[1]]
• Reuters: SIAE.SI [[1]]
• Bloomberg: SIE SP [[1]]
• Market cap: US\$1,988m / S\$2,593m [[1]]
• Average daily turnover: US\$0.91m / S\$1.21m [[1]]
• Current shares o/s: 1,122m [[1]]
• Free float: 22.4% [[1]]

Major Shareholders (% held)

• Singapore Airlines: 77.6 [[1]]

Financial Summary

Results Comparison

• 2HFY25 revenue higher hoh due to higher line maintenance volume, and higher unit revenue per airframe check [[2]].
• 2HFY25 EBITDA margin rose hoh, as operating costs did not rise by as much as revenue [[2]].
• FY25 EBIT rose yoy as losses at the engine & component business narrowed, partially offset by lower profits at the airframe overhaul & line maintenance segment [[2]].
• 2HFY25 share of associates and JVs were slightly higher hoh, but rose 18% yoy due to better performance by ESA, SAESL, etc [[2]].
• 2HFY25 effective tax rate rose hoh [[2]].
• 2HFY25 net profit slightly higher hoh, with higher EBIT and share of associates and JVs consumed by higher taxes [[2]].
• 2HFY25 core net profit rose yoy due to the stronger EBIT and higher share of associates and JVs [[2]].
• 4QFY25 rev rose qoq due to higher engine & component rev, while EBIT margin rose qoq due to higher volume of heavy checks [[2]].
• Qoq fall due to lower profits from SAESL [[2]].
• 4QFY25 net profit fell qoq due to lower share of associate and JV profits [[2]].

Operating Metrics

• This segment’s revenue rose hoh and yoy despite the fall in the number of airframe checks as SIE performed heavier checks that took more time, but attracted higher revenues per check [[3]].
• This segment’s revenue rose hoh and yoy due to higher work volumes [[3]].
• This segment’s EBIT fell in FY25 as the improvement in operating surplus was not sufficient to offset the costs to set up new ventures in Cambodia (TIA), Malaysia (BMM), higher training costs in Singapore, and IT-related project costs [[3]].
• This segment’s EBIT loss narrowed yoy as SIE work volumes increased coupled with higher efficiency [[3]].
• Lower volume of airframe checks [[3]].
• Light checks declined due to changes in aircraft utilization of the third-party airlines [[3]].
• Fewer heavy checks yoy due to longer time taken to service SIA’s A380s as well as other legacy aircrafts [[3]].
• Line maintenance flights rose due to higher capacity deployment by airlines at Changi Airport [[3]].
• SIE’s market share at Changi Airport at c.85% [[3]].
• Stable number of aircraft under fleet management [[3]].

Cost Metrics

• Material costs rose sharply due to higher work volume and inflation, but this is fully passed-through to customers [[4]].
• Staff costs rose at a slower pace than in previous years, as staff availability has improved and attrition rate has normalised [[4]].
• Subcontract costs rose sharply as a new and higher rate 3-year agreement took effect in FY25 [[4]].
• Other op expenses rose modestly in FY25 as SIE had trimmed a lot of support costs [[4]].

ESG Analysis

• SIE has made steady progress in improving its ESG standing via increased environmental and social initiatives [[7]].
• According to LSEG, the group’s overall ESG score improved from C in FY18 to B- in FY23 [[7]].
• Current score of B- is split into Environment: A (29.1%), Social: B- (42.7%) and Governance: C- (28.2%) [[7]].
• The group will continue to improve its ESG standing as it strives towards its long-term 2030 carbon emissions target [[7]].
• SIE was fined S\$230k in FY18 over a workplace safety lapse, which resulted in the death of a foreign worker at the Changi Hangar Complex [[7]].
• Since FY18, the group has steadily improved its safety measures, resulting in a decline in the reportable accident rate (accidents per million hours) from 2.06 in FY18 to 1.62 in FY20 [[7]].
• SIE improved its Environmental score to A in FY23 from C in FY18 due to 1) installation of solar photovoltaic systems and 2) setting a long-term target of achieving more than 24.48% reduction in carbon emissions intensity level by 2030F [[7]].
• SIE steadily improved its Social score from C in FY18 to B- in FY23 [[7]].
• In FY18, SIE introduced various initiatives to promote safe workplace behavior [[7]].
• In FY22, SIE launched its new Lean Academy, a training institute targeted at re-skilling and upskilling its workforce [[7]].
• In FY23, SIE launched a diversity task force to implement initiatives that promote inclusiveness and attract varied talents from various backgrounds [[7]].

Sector Comparisons