CGS International

May 21, 2025

SIA Engineering: New SIA Contract Poised to Significantly Boost Earnings

Executive Summary

• SIA Engineering (SIE) recently announced a new 2+1 year contract with Singapore Airlines (SIA) and Scoot, effective April 1, 2025. [[1]]
• This contract is expected to increase chargeable labor revenue by 55%. [[1]]
• CGS International believes SIE’s FY26F core EPS could see a gross enhancement of 35%. [[1]]
• However, set-up costs for new ventures may limit the net enhancement to 15%. [[1]]
• The report reiterates an “Add” rating for SIE and raises the target price by 15% to S\$3.10. [[1]]
• This target price is based on a CY26F P/E of 19.5x, which is the mean since 2006, applied against the proforma enhanced earnings. [[1]]

Contract Details and Financial Impact

• The new Comprehensive Services Agreement with SIA and Scoot is for 2+1 years, effective April 1, 2025, superseding the previous agreement signed on April 1, 2023. [[1]]
• The agreements are projected to yield a total labor revenue of S\$1.3 billion over the 2-year term, equating to S\$650 million per annum. [[1]]
• In comparison, the previous agreement signed in April 2023 was worth S\$1.14 billion for three years with SIA and S\$120.8 million for three years with Scoot, totaling S\$420 million p.a. [[1]]
• The new contract represents a 55% increase in annual chargeable manhours compared to the old contracts. [[1]]
• Assuming a 10% increase in work volume, this implies a 41% increase in manpower charge-out rates. [[1]]
• CGS International forecasts SIA group’s Available Seat Kilometre (ASK) passenger capacity for FY26-27F to be approximately 10% higher than the actual ASK capacity for FY24-25, using this as a proxy for increased maintenance work. [[1]]

Earnings Enhancement Analysis

• The proforma net impact on SIE’s FY26F core net profit is a 35% enhancement, increasing it to S\$206 million from the current forecast of S\$153 million. [[1]]
• Increased expensing of set-up costs for new facilities in FY26F may offset some gains. [[1]]
• Assuming set-up costs amount to 5% of FY25 staff costs, this would be around S\$30 million p.a. [[1]]
• Deducting this S\$30 million from the proforma FY26F core net profit results in a net of S\$176 million, a 15% enhancement compared to the current forecast. [[1]]
• SIE’s share price increased by 4.5% following the announcement. [[1]]
• Potential catalysts for further rerating include the release of 1QFY26F results in mid-August 2025. [[1]]
• Downside risks include set-up costs being larger than assumed. [[1]]

Recommendation and Target Price

• CGS International reiterates an “Add” rating. [[1]]
• The target price is increased by 15% from S\$2.70 to S\$3.10. [[1]]
• The target price is based on a net proforma core EPS enhancement of 15%, derived from back-of-the-envelope calculations. [[1]]

Assumptions Behind Earnings Projections [[2]]

• 80% of base and line maintenance revenues in FY25 were attributable to the SIA group business. [[2]]
• The non-SIA group business, constituting 20% of revenues, is assumed to remain unchanged in FY26F. [[2]]
• Labor revenues make up 50% of total base and line maintenance revenues from the SIA group business. [[2]]
• This labor revenue portion is expected to see a 41% manpower rate increase in FY26-27F, assuming a 10% increase in work volume. [[2]]
• Non-labor revenues are projected to increase by the assumed 10% volume increase. [[2]]
• Material costs and staff costs in FY26F are expected to increase by the 10% volume increase, plus a 5% inflation rate. [[2]]

New Facilities and Expansion [[2]]

• SIE is setting up a new line maintenance business in Cambodia, expected to be operational from July 2025F. [[2]]
• SIE is taking over two hangars in Subang, Malaysia by 2HCY25F to target widebody business. [[2]]
• Hangar facilities with Air India in Bangalore are planned by CY26F. [[2]]
• A new component outfit is being set up at Shah Alam, intended to be partially operational this year. [[2]]
• The SAESL engine JV started a 2-year capacity expansion project from January 2025. [[3]]
• SAESL anticipates manpower and training costs in advance of facility openings, impacting the P&L. [[3]]

Valuation Analysis [[3]]

• The new target price of RM3.10 implies a CY26F P/BV of 1.9x, which is 2 standard deviations above the depressed P/BV mean since 2020. [[3]]
• However, it represents a P/BV multiple of 1.5 standard deviations below the long-term average between 2001 and 2019. [[3]]

Sector Comparisons [[4]]

ESG Analysis [[5]]

• SIE has shown steady improvement in its ESG standing, with its overall ESG score improving from C in FY18 to B- in FY23. [[5]]
• The current score of B- is broken down into:
  • Environment: A (29.1% weightage) [[5]]
  • Social: B- (42.7% weightage) [[5]]
  • Governance: C- (28.2% weightage) [[5]]
• The report anticipates further ESG improvements as SIE pursues its 2030 carbon emissions target. [[5]]

Key ESG Considerations

• Workplace Safety:
  • SIE was fined S\$230k in FY18 due to a workplace safety lapse resulting in a foreign worker’s death. [[5]]
  • Another fatal incident occurred in FY20 involving an employee falling from an aircraft. [[5]]
  • The report highlights the importance of maintaining high workplace safety standards. [[5]]
  • Reportable accident rates have declined from 2.06 in FY18 to 1.62 in FY20, with zero work-related fatalities in FY21-23. [[5]]
• Environmental Performance:
  • SIE’s Environmental score improved to A in FY23 from C in FY18 due to:
    • Installation of solar photovoltaic systems, reducing electricity consumption from non-renewable sources by 20%. [[5]]
    • Setting a long-term target of achieving over 24.48% reduction in carbon emissions intensity level by 2030F (base year: FY14). [[5]]
• Social Initiatives:
  • SIE’s Social score steadily improved from C in FY18 to B- in FY23. [[5]]
  • Initiatives include:
    • Aircraft towing simulator for risk-free virtual training. [[5]]
    • Automated guided vehicles (AGVs) with enhanced safety features. [[5]]
    • Computer-based workplace safety training module. [[5]]
    • Launch of the Lean Academy for re-skilling and upskilling the workforce. [[5]]
    • Establishment of a diversity task force to promote inclusiveness. [[5]]

Financials By The Numbers [[6]]

Balance Sheet Highlights [[7]]

Key Ratios and Drivers [[7]]