Analysts at CGS International and OCBC Investment Research are keeping their respective “add” and “buy” calls on SIA Engineering (SIAEC) following the company’s 1QFY2025 ended June results.
While CGSI analysts Kenneth Tan and Lim Siew have lowered their target price to $2.65 from $2.75, OCBC analyst Ada Lim has kept her fair value of $2.69 unchanged.
Although SIAEC reported a 205% greater q-o-q and 23% higher y-o-y net profit of $33 million for the period, it did not meet Tan and Lim’s estimate of $37 million, which formed 22% of both theirs and 21% of Bloomberg’s three-year forecast.
They write: “We attribute the miss to lower-than-expected revenue growth of 3% y-o-y, which was due to supply chain constraints impacting base maintenance works. While earnings before interests and taxes (ebit) remained positive at $1 million (150% higher y-o-y), ebit margin was only up slightly by 0.2 percentage points (ppts) y-o-y as labour and material costs remained elevated.”
For the period, SIAEC’s share of associate profits was its “main earnings driver” at a growth of 28% y-o-y, driven by meaningful growth from engine associates.
While the company does not provide quarterly segment revenue contribution, Tan and Lim estimate its engine and component segment to have recorded “strong y-o-y growth”, while its airframe segment “likely declined y-o-y”.
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Meanwhile, flights handled by SIAEC during the period were healthy, growing 12% y-o-y, but the number of checks performed saw a slowdown at 4% lower y-o-y, which the company attributes to supply chain constraints and longer checks for older aircraft.
“We still believe healthy industry trends are intact, backed by elevated maintenance, repair and overhaul (MRO) demand from a slow pace of new aircraft deliveries and issues with newer engine models and strong travel demand. Ongoing contract repricing could also flow through more meaningfully in the coming quarters, in our view,” write the analysts.
For SIAEC’s FY2025, Tan and Lim expect the company’s associates to form around 80% of the company’s core net profit.
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They explain: “We expect 49%-owned Eagle Services Asia (ESA) to be a key driver of SIAEC’s FY2025 earnings, as the associate should benefit from elevated geared turbofan (GTF) work volumes in view of safety-related recalls. Workshop expansion initiatives at both ESA and Singapore Aero Engine Services (SAESL) (50%-owned joint venture) should support longer-term associate profits growth for SIAEC, in our view.”
Overall, the analysts are still of the view that SIAEC is “set to benefit from favourable MRO trends”.
“We conservatively lower our FY2025 to FY2027 earnings per share (EPS) by 3% to 4%, mainly on slower revenue growth assumptions to reflect the slow 1QFY2025,” write Tan and Lim.
Re-rating catalysts noted by the analysts include strong ESA profits and consistent improvement in ebit profitability, while downside risks include an impact in MRO volume from an economic slowdown, as well as prolonged margin pressure.
Meanwhile, SIAEC’s results from the period were “broadly in-line” with the expectations of OCBC’s Lim.
However, she notes that the company’s expenditure rose by 2.4% y-o-y to $267.7 million, largely driven by higher material and manpower costs.
Lim writes: “The broader MRO market continues to struggle with a shortage of manpower and supply chain constraints, which invariably place upward pressure on costs. Nonetheless, we remain constructive on the industry and especially engine maintenance, as operational issues (particularly from next-generation engines) necessitate more inspections and unplanned visits to the shop.”
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The OCBC analyst also notes that SIAEC has “been making active inroads” into India, signing a 12-year Inventory Technical Management (ITM) agreement with Air India in February to provide component support coverage for its current fleet of Airbus A320 family aircraft and its subsequent partnering with the airline in May for the development of its base maintenance facilities in Bangalore, India.
Potential catalysts noted by Lim include a faster fleet expansion by global airlines, quicker-than-expected easing of cost pressures from inflation, raw material, and labour shortage, and lastly, a stronger-than-expected recovery in contributions from associated and joint-venture companies.
Conversely, noted investment risks include growing the talent pipeline amidst a tight labour market and global competition, as well as a significant dependence on SIAEC’s parent company, Singapore Airlines C6L , for maintenance jobs.
As at 11.13 am, shares in SIAEC are trading two cents higher or 0.97% up at $2.31.
