SIA Engineering Co Ltd: Poised for Growth Amidst Challenges

SIA Engineering Company (SIAEC) stands as a global leader in the Maintenance, Repair, and Overhaul (MRO) industry, serving over 80 international airlines and aerospace equipment manufacturers. Despite facing persistent challenges such as manpower shortages and supply chain constraints, the company’s strategic investments and robust market positioning ensure a constructive future outlook.

3QFY25 Financial Performance

In its 3QFY25 performance, SIAEC recorded significant growth, with revenue increasing by 11.3% year-on-year (YoY) to SGD324.8 million. Net profit surged by an impressive 42% YoY to SGD38.2 million, translating to basic and diluted earnings per share (EPS) of 3.42 and 3.40 Singapore cents, respectively. The company also handled 8.4% more flights YoY in Singapore, with December 2024 flight volumes exceeding pre-COVID levels. However, the number of aircraft checks conducted at its Singapore base decreased YoY due to a higher proportion of checks with heavier work content, which extended hangar stays amidst ongoing supply chain issues.

9MFY25 Highlights

For the nine months ending December 2024, SIAEC’s revenue and net profit grew 11.8% and 24.1% YoY to SGD901 million and SGD107 million, respectively. This performance aligns with the company’s full-year forecasts, achieving 73.8% of the projected revenue and 75.5% of the projected net profit. Operating expenses grew at a slower rate of 8.5% YoY due to higher manpower and repair costs, enabling the company to book an operating profit of SGD4.7 million during the quarter, reversing a loss of SGD3.4 million in 3QFY24.

Investment Thesis and Revised Fair Value Estimate

SIAEC’s investments in capacity expansion, partnership growth, and capabilities development position it to benefit from the robust MRO demand. Additionally, the company’s exposure to the burgeoning Indian market adds to its long-term growth potential. However, challenges around supply chain constraints and a tight labor market continue to exert upward pressure on costs.

The revised fair value (FV) estimate for SIAEC is SGD2.64, trimmed from SGD2.76 due to a higher cost of equity, reflecting an increased risk-free rate and marginally higher beta. Nevertheless, the rating remains a “BUY,” with total expected returns exceeding 10% within a 12-month investment horizon.

ESG Highlights

SIAEC’s ESG rating improved in October 2024, driven by enhanced corporate governance measures. The company boasts a majority-independent board (30% women) and a fully independent audit committee. Its safety practices, including ISO45001 certification and hazard monitoring, have resulted in low injury rates compared to peers. While excelling in business ethics, SIAEC lags behind its competitors in adopting biodiversity conservation measures, focusing primarily on energy, water, and waste management.

Potential Catalysts and Risks

• Potential Catalysts: Faster fleet expansion by global airlines, quicker easing of cost pressures, and stronger-than-expected contributions from associated and joint venture (JV) companies.
• Key Risks: Lower air travel demand, challenges in talent acquisition, and dependence on Singapore Airlines for maintenance jobs.

Peer Company Analysis

Singapore Technologies Engineering Ltd (STEG.SI)

Singapore Technologies Engineering Ltd (STEG) is a diversified technology, defense, and engineering group. Its valuation metrics indicate a price-to-earnings (P/E) ratio of 21.8 for FY25E, which is higher than SIAEC’s 18.2. It also boasts a strong price-to-book (P/B) ratio of 5.8, reflecting robust investor confidence. The dividend yield stands at 3.2%, slightly lower than SIAEC’s 3.9%. With a return on equity (ROE) of 27.3% for FY25E, the company is a strong performer in terms of profitability. The company is well-positioned for continued growth, though its higher valuation metrics may make it less attractive than SIAEC for value-focused investors.

AAR Corp (AIR)

AAR Corp is a leading independent provider of aviation services. The company exhibits a competitive P/E ratio of 17.3 for FY25E, slightly below SIAEC’s, indicating an attractive valuation. However, AAR Corp lacks specific data for P/B, EV/EBITDA, and dividend yield metrics in this analysis. Its focus on cost-efficient MRO solutions positions it well in the competitive landscape, but the absence of detailed financial metrics limits a comprehensive comparison with SIAEC.

Thales SA (TCFP.PA)

Thales SA, a global leader in aerospace, defense, and security, demonstrates a balanced financial profile with a P/E ratio of 19.3 for FY25E and a dividend yield of 2.1%. Its P/B ratio stands at 4.5, indicating substantial book value backing. With an ROE of 23.7%, the company shows strong profitability. Thales SA’s diversified business model and focus on high-margin segments make it a formidable competitor in the MRO and aerospace sector.

Safran SA (SAF.PA)

Safran SA, a prominent player in the aerospace and defense sector, has the highest P/E ratio among peers at 30.2 for FY25E, reflecting premium valuation expectations. Its P/B ratio of 7.6 and dividend yield of 1.3% further highlight its position as a growth-oriented company. With an ROE of 26.7% for FY25E, Safran demonstrates excellent profitability metrics. However, its high valuation multiples may deter value-focused investors.

Conclusion: SIAEC as a Strong Investment Opportunity

SIA Engineering Co Ltd emerges as a strong contender in the MRO sector, backed by its strategic investments, robust financial performance, and improving ESG metrics. While challenges such as manpower shortages and supply chain constraints persist, the company’s long-term growth prospects remain intact. The “BUY” rating with a fair value estimate of SGD2.64 reflects confidence in its ability to deliver strong returns over a 12-month horizon.

Compared to its peers, SIAEC offers an attractive combination of valuation, dividend yield, and growth potential. Investors seeking exposure to the growing MRO industry will find SIAEC a compelling choice amidst a competitive landscape.