CGS International is keeping “overweight” on the airport services sector as issues with newer generation aircraft and engines continue to surface into 2024.
Analysts Lim Siew Khee and Kenneth Tan explain that this will be driven by the widespread recall of geared turbofan engines (GTF) and increased inspections of specific Boeing aircraft models such as the B737 MAX and B787.
“We believe these issues should result in increased grounding of aircraft as affected jets undergo inspections and repairs, likely disrupting capacity ramp-up for airlines. With airlines facing a combination of strong travel demand and continued delays in new aircraft deliveries from original equipment manufacturers, we expect airlines to make up for lost capacity by extending the service life of older aircraft and reinstating inactive aircraft,” they add.
This should result in heightened maintenance, repair and overhaul (MRO) demand in 2024 to 2025, given the heavier work content for older jets — presenting tailwinds for both SIA Engineering and Singapore Technologies Engineering S63 (ST Engineering) ahead, in the analyst's view.
CGS believes SIA Engineering is set for FY2024-FY2025 earnings boost from GTF issues as its 49%-owned associate Eagle Services Asia (ESA) could lead the inspection process for all Southeast Asia-based affected aircraft.
The analysts estimate GTF-related recalls could drive about $5 million to $10 million in additional net profit per annum for SIA Engineering over FY2024-FY2026. This is on ESA’s higher pricing power and gradual easing of supply chain woes driving increased engine induction volumes.
CGS raises its FY2025-FY2026 ebit assumptions by 13-20% as the analysts believe stronger operating leverage and efficiency gains following SIA Engineering’s transformation initiatives should help alleviate elevated staff cost pressures.
With a more favourable earnings outlook and decent valuation of 17x 2025 P/E, the analysts upgrade SIA Engineering to “add” with a higher target price of $2.70.
Meanwhile, ST Engineering is also well positioned to capture the elevated MRO demand in the US and China, regions with large proportions of affected A320neo and B737 MAX, the analysts point out.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
The shifting market share in favour of Leading Edge Aviation Propulsion (LEAP) engines could drive longer-demand for ST Engineering’s engine MRO services in Singapore, given its positioning as the largest provider of end-to-end LEAP engine services in Asia.
Improving passenger-to-freighter profitability is also a key driver of its aerospace segment margin expansion in the coming years, in CGS’s view. The analysts are keeping “add” on ST Engineering with a TP of $4.36.
As at 11.07am, shares in SIA Engineering and ST Engineering are trading at $2.31 and $3.94 respectively.
