Continued Flight Recovery
SIA Engineering Co. Ltd. (SIAEC) has observed a significant recovery in its flight operations. As of September 2024, the company’s line maintenance business managed 95% of the total flights compared to pre-COVID levels. This resurgence in flight activities has spurred a rising demand for aircraft maintenance, repair, and overhaul (MRO) services. The upward trend is expected to persist as airlines intensify their flight schedules, particularly with the year-end peak travel season and more visa-free travel agreements being established between countries.
Subang Base Operational in 2H25
Base Maintenance Malaysia Sdn. Bhd. (BMM), a wholly-owned subsidiary of SIAEC, signed a lease agreement in December 2023 for two hangar facilities in Subang, Malaysia. These hangars, with a combined capacity for six simultaneous aircraft checks, will add to SIAEC’s portfolio with a 15-year lease term. Operations are expected to begin in the second half of 2025, contributing to the company’s revenue growth.
Interim Dividend
SIAEC declared an interim 1HFY25 dividend of 2 SG cents per share, maintaining the same dividend as 1HFY24. Looking ahead, the company is expected to benefit from the continuing recovery in flight activities, especially with the coming year-end winter travel season, which will drive the demand for MRO services.
Financial Performance
For 1HFY24/25, SIAEC reported a revenue of S\$576.2 million, marking a 12.1% year-on-year increase from S\$514.0 million in 1HFY23/24. This growth reflects the company’s advantage from the recovering demand for aircraft MRO services. The operating profit for 1HFY24/25 was S\$3.4 million, a significant rise from S\$0.1 million in 1HFY23/24. Group profit after tax was S\$68.8 million, up 16.0% year-on-year, largely due to higher profits from joint ventures and associated companies.
Valuation and Action
KGI Securities maintains an OUTPERFORM recommendation with an unchanged target price (TP) of S\$2.59, based on a Discounted Cash Flow (DCF) valuation, with a terminal growth rate of 2.5% and a Weighted Average Cost of Capital (WACC) of 8.49%. The demand for aircraft MRO services is expected to benefit from the continued recovery in flight activities, alongside the upcoming year-end travel seasonality.
Risks
SIAEC’s primary risk is associated with global flight activities, which are crucial for its revenue. A resurgence of pandemics, natural disasters, or ongoing geopolitical tensions could significantly impact and reduce flight activities, thereby affecting SIAEC’s revenue. Additionally, the company faces translation risks due to business transactions in various foreign currencies.
Strong Business Operations
The company’s line maintenance business at Changi Airport has reached 95% of pre-pandemic levels, with a 9.3% year-on-year increase in the number of flights handled in 1HFY24/25. In contrast, the base maintenance segment in Singapore saw a slight decline in the number of light and heavy checks, primarily due to a higher mix of legacy aircrafts requiring heavier work content and cabin refurbishments. However, the Clark base experienced a two-fold increase in heavy checks year-on-year. The Clark base is also the first Embraer Authorized Service Centre in Asia Pacific for Embraer E-jets E2 aircraft. The component service segment saw an increase in fleet size managed by its inventory technical management business, rising to 188 aircraft from 104 a year ago. SIAEC’s hangars in Singapore and Clark have a strong utilization rate of approximately 90%, demonstrating strong demand for MRO services in these key markets.
Framework Agreement with Xiamen Iport Group
SIAEC recently signed a non-binding Framework Agreement to explore a potential investment in Arport Aircraft Maintenance & Engineering (Fujian) (“Arport AME”), a subsidiary of IPORT Group that provides line maintenance and ground services at airports in Fujian, China. This partnership offers SIAEC additional revenue sources over the long term, subject to regulatory requirements and necessary approvals.
Strategic Partnership with Air India
SIAEC announced a strategic partnership with Air India to develop Air India’s BM facilities in Bangalore, India. This collaboration involves planning, construction, development, and operationalization of these facilities, scheduled for completion in 2026. The BM facilities will include both widebody and narrowbody hangars, along with associated repair shops, to support the growing MRO needs of Air India Group’s aircraft fleet.
Upbeat Outlook
Flight activities in Singapore have continued to improve since 2022, with commercial aircraft movements at Changi Airport reaching 328 thousand flights in 2023, which is 85.8% of pre-pandemic levels. As of June 2024, Changi Airport recorded 179 thousand flights, representing 54.6% of FY23 levels. Increased visa-free travel agreements with Singapore and the release of more flight routes are expected to boost flight activities further in 2024 and 2025. The upcoming winter holidays and peak travel season are anticipated to drive higher demand for MRO services, benefiting SIAEC.
Subang Base to be Operational in 2H25
In December 2023, Base Maintenance Malaysia Sdn. Bhd. (BMM), a wholly-owned subsidiary of SIAEC, signed a 15-year lease for two hangar facilities in Subang, Malaysia. These facilities will support up to six simultaneous aircraft checks and are expected to begin operations in the second half of 2025, contributing to SIAEC’s revenue growth. Additionally, SIA Engineering signed agreements with ADMAL Aviation College and APR-Aviation Training Centre to recruit and train graduates, as well as with the University of Kuala Lumpur to develop industrial training programs. These collaborations aim to expand Malaysia’s aviation talent pool and may help reduce future operational costs at the Subang base.
Strong Share Buybacks
SIAEC maintains a strong cash position of S\$493.2 million. The company intends to continue providing value to investors through share buybacks in FY24/25. The company has executed share buybacks totaling 5.03 million shares year-to-date, higher than pre-pandemic levels.
Long-term Growth
The company highlighted that associated start-up and development costs over the next 2 to 3 years may temper the Group’s financial performance. SIAEC also plans to increase investments to enhance its business operations. While operating profits may be subdued in the near term, the company’s business expansion initiatives are expected to position SIA Engineering favorably for long-term benefits.
