DBS Group Research analysts Jason Sum, Tabitha Foo and Paul Yong have identified Singapore Technologies Engineering S63 (ST Engineering) and Sats as their top picks in the Singapore Aviation Sector with target prices of $5.40 and $4.40, respectively.
On the other hand, the analysts maintain their “hold” calls on Singapore Airlines C6L (SIA) and SIA Engineering Co (SIAEC) with target prices of $6 and $2.50, respectively.
The analysts note that the Singapore aviation sector has a “promising outlook despite some uncertainty”, as global air passenger traffic continues to recover strongly, growing 11.3% y-o-y in 9M2024 ytd.
Rising aircraft use and an ageing fleet further boost maintenance activity while strong consumer travel demand, easing inflation and a positive macroeconomic environment drive lead to a positive outlook for passenger traffic.
Conversely, air cargo outlook is clouded by a potential trade war. While short-term stockpiling ahead of tariffs may provide a temporary boost, global trade and air cargo volumes could face significant declines in 2H2025.
The analysts expect a 3%-5% y-o-y fall in air cargo volumes in a base case and a 6%-8% y-o-y fall in a bear case.
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On the defence front, geopolitical tensions are driving global military spending, with North Atlantic Treaty Organisation (NATO) members planning to hike their military budget and countries facing mounting pressure to increase defence spending, presenting opportunities for defence exports.
To this end, the analysts favour ST Engineering for its robust growth profile and attractive valuation and potential upside from its defence business.
The analysts find the risk-to-reward profile for ST Engineering the most compelling, given that its growth profile, a 17% two year adjusted earnings-per-share (EPS) compound annual growth rate (CAGR), is still not reflected in its share price.
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While ST Engineering’s passenger-to-freighter (P2F) business will likely be hindered by a lack of free stock, the analysts note that management is reaffirming their expectations of a P2F margin improvement.
The analysts expect its other commercial aerospace businesses and commercial maintenance, repair and overhaul to fare better over the next two years.
Additionally, the analysts believe that there could be potential upside if US president-elect Donald Trump’s boost to global defence spending translates to increased defence exports.
The analysts remain positive on Sats despite a moderately less favourable set-up given the threat of tariffs on the cargo-handling business.
“We also like Sats despite near-term risks to its cargo segment as its global footprint and dominant position in key hubs offer resilience, while its ground handling and food segments should help offset cargo weakness,” they say.
Moreover, the analysts are optimistic on the longer-term growth trajectory in global trade and air cargo given structural e-commerce growth, global supply chain expansion and macroeconomic growth.
However, the analysts maintain a “neutral” stance on SIAEC as its current valuation at 18-20 times forward price-to-earnings ratio (P/E) is no longer justified given its relatively weak earnings.
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“We envisage an extended recovery path for its core operations given its supply chain woes and delayed re-pricing of rates charged to its key customer, SIA,” the analysts add.
Similarly, the analysts “continue to stay on the sidelines” on SIA, as they expect sustained margin erosion heading into FY2026 with the group facing headwinds from pricing compression and cost pressures.
While lower jet fuel prices could offer some relief, this will likely be more than offset by weakness in its air cargo segment should there be a trade war.
Consequently, SIA’s earnings are likely to deteriorate further over the next year before improving from FY2027.
As at 10.41 am, shares in ST Engineering and Sats are trading at $4.58 and $3.76, respectively.
As at 10.41 am, shares in SIA and SIAEC are trading at $6.34 and $2.43, respectively.
