DBS’s Jason Sum believes that with flag carrier Singapore Airlines(SIA) sticking to its strategy of maintaining a young, technologically advanced fleet of aircraft, SIAEC will be provided maintenance opportunities aplenty, as indicated by a recently announced contract renewal.
Although SIAEC services other customers, the bulk of its turnover, or around 70% to 80% of the top line, is driven by its parent company.
In his June 13 report, he writes: “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 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.
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“Before 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.
After adjusting for SIA Group’s fleet expansion from 195 aircraft in March 2023 to 205 in March, 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 is primarily concentrated in Asia, positioning the group’s earnings for regional passenger traffic growth.
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Furthermore, SIAEC’s partnerships with Air India, new engine capabilities for the LEAP-1A/1B and PW1900, and a new base for maintenance in Subang, Malaysia, from this year will be additional drivers for its business in the medium term.
SIAEC has also secured joint line maintenance ventures 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 target price to $3.50, reflecting a higher 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. Sum expects consensus estimates to be raised once SIAEC reports stronger-than-expected margins and earnings in upcoming quarters.
However, one key risk noted by Sum is weaker consumer sentiment, which will lead to capacity cuts and deferral of MRO in Asia, with 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, presumably requiring more intensive service and maintenance work. Older aircraft in service will drive a 2.7% CAGR for the MRO market over the next decade, says Lim, citing management consulting firm Oliver Wyman.
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, she says.
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 SIA 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 patmi forecasts by 16.2% and 13.7%, respectively to take this into account.”
While she has left her forecasts intact, Lim has raised her terminal growth rate assumption by 25 basis points to 2%.
Potential catalysts noted by Lim include a faster fleet expansion by global airlines, quicker-than-expected easing of cost pressures, and a stronger-than-expected recovery in contributions from associated and joint-venture companies. On the other hand, investment risks include lower air travel and MRO demand, talent pipeline challenges and significant dependence on SIA.
