“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 (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.
See also: UOBKH raises TP on SIA to $6.22, FY2026 earnings to see lift on fuel cost savings
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.
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.
