DBS’s Jason Sum sees that flag carrier Singapore Airlines(SIA), with its strategy to maintain a young, technologically advanced fleet of aircraft, provides SIAEC with maintenance opportunities aplenty with its renewed contract, given that around 70% to 80% of the group’s top line is driven by its parent company.
He writes in his June 13 report: “The two-year contract is valued at $1.3 billion, implying an annualised labour revenue run-rate of $650 million. Management clarified that this renewal consolidates previously separate contracts for SIA cargo and SilkAir, and also covers SIA’s upcoming A350 cabin retrofit programme.”
Additionally, based on Sum’s estimates, SIA’s $1.1 billion A350 cabin retrofit contract should contribute around $100 million annually to SIAEC, assuming 40% of the contract value relates to technical labour and installation.
“Prior to the renewal, the annual run-rate for all contracts was about $492 million. Excluding the retrofit contribution, the new run-rate stands at roughly $552 million, representing a 12.3% increase,” writes Sum.
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After adjusting for SIA Group’s fleet expansion from 195 aircraft in March 2023 to 205 in Mar 2025, Sum estimates the contract brings a high single-digit uplift in MRO rates charged to the group, which beats his previous expectation of a mid-single-digit increase.
Meanwhile, aside from its operations in Singapore, Japan, and the Philippines, SIAEC's broader network of associates and joint ventures (JV) is primarily concentrated in Asia, positioning the group's earnings for growth of passenger traffic in the region.
Furthermore, SIAEC’s partnerships with Air India, new engine capabilities for the LEAP-1A/1B and PW1900 and new base for maintenance in Subang, Malaysia from 2025 will be additional drivers for the group in the medium term.
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The group has also secured line maintenance JVs in Cambodia and Malaysia, and capacity expansion at Eagle Services Asia (ESA) and Singapore Aero Engine Services (SAESL).
“Consequently, we raise our FY2026/FY2027 earnings estimates by 5% to 6% to factor in a higher rate increase, and lift our TP to $3.50, reflecting a higher price-to-earnings ratio (P/E) multiple of 21 times, up from 19 times previously, supported by a broader sector rerating,” writes Sum.
The DBS analyst’s earnings estimates are now the highest on the street, and he expects consensus estimates to be raised once SIAEC reports stronger-than-expected margins and earnings in upcoming quarters.
One key risk noted by Sum, is weaker consumer sentiment leading to capacity cuts and deferral of MRO in Asia, and supply chain bottlenecks dampening volumes or increasing costs.
Meanwhile, OIR’s Ada Lim notes that the shortage of aircraft coming off factory floors means older planes in the sky, to which management consulting firm Oliver Wyman expects to drive a 2.7% compound annual growth rate (CAGR) for the MRO market over the next decade.
She writes: “With Asia Pacific poised to remain the fastest growing region, SIAEC is well-positioned given that 70.4% of its FY2025 revenue was derived from East Asia.”
Since the stock’s last close on May 20 when the new renewal contract was signed with SIA group, Lim notes that SIAEC’s share price has “been on a tear”, up more than 25%.
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“To recap, the newly inked agreements with Singapore Airlines and Scoot translate to a significant 54.7% step-up in total labour revenue per annum, and we have previously raised our FY2025 and FY2026 profit after tax and minority interests (patmi) forecasts by 16.2% and 13.7%, respectively to take this into account.”
While she has left her forecasts intact, Lim raised her terminal growth rate assumption by 25 basis points (bps) to 2%.
Potential catalysts noted by Lim include a faster fleet expansion by global airlines, quicker-than-expected easing of cost pressures, as well as a stronger-than-expected recovery in contributions from associated and JV companies.
On the other hand, investment risks include lower air travel and hence, MRO demand, talent pipeline challenges and significant dependence on SIA.
Shares in SIAEC closed six cents higher or 1.95% up at $3.14 on June 16.
