SIA Engineering: Attractive Business With Stretched Valuation (OTCMKTS:SEGSF)

Airlines do not make for the most stable investment opportunities. I see more value in OEMs, suppliers of aircraft parts, aircraft lessors and airports. Another area that, I believe, is better equipped to capitalize on long-term growing demand for air travel are aircraft maintenance providers. There aren’t a lot of pure-play aircraft maintenance providers, but SIA Engineering Company is one of them. In this report, I will be analyzing the company to see whether it is worthy of investment.

SIA Engineering Company Provides A Broad Range Of MRO Services

SIA Engineering Company was spun off from Singapore Airlines in 2000. The company provides line maintenance services at 33 airports and has 9 hangars in Singapore and the Philippines for base maintenance, with two hangars in Malaysia becoming operational in the current fiscal year. The company also provides component support, cabin refurbishment and engine services for the most popular engines such as the CFM56, LEAP Series, GE90, GEnx, the Trent series of engines and the while it also has a joint venture with RTX for the overhaul of PW1000G GTF engines.

Revenues grew 37.5% supported by strong demand for MRO services and despite significant cost growth, the revenues still outpaced cost growth. The increase in expenditures was mainly driven by higher staff costs which increased by 35% and material costs which increased by 72%. So, we definitely see that inflation has increased labor and material costs, but it seems that SIA Engineering was able to pass those costs on to customers. With increased capacity and capability for engine maintenance, we also saw a 71% increase in engine and component revenues bringing the share of engine and component revenues to 23.6% up from 19% in the prior year. So, we see that SIA Engineering is capitalizing well on the increased demand for maintenance services, leading to after-tax profit jumping from SGD 66.4 million to SGD 97.1 million. What should be kept in mind is that the group itself is not a very profitable company. With an SGD 2.3 million profit, it has a very slim margin and most of the profits are generated via joint ventures. Excluding impairments, the profits would have been SGD 123.9 million, indicating or a 93% increase in group profit. So, the strength of SIA Engineering companies primarily lies in its joint ventures. The impairment was driven by the PurePower PW1500G, on which the company is a risk and revenue sharing partner.

What Are The Risks And Opportunities For SIA Engineering?

For SIA Engineering, the main risk would be a reduction in flight activity that would reduce demand for aircraft and engine maintenance. Another risk is part shortages, which increase turnaround times in the maintenance shops. Currently, I don’t think we will be seeing reduced demand for maintenance any time soon. As OEMs are terribly late on new aircraft deliveries, airlines have to keep older aircraft in service, and at times, even take aircraft out of storage, which increases demand for shop visits. SIA Engineering has expanded its engine shop capacity for quick turns from 12 to 20 engines, and the hangars in Malaysia will also provide additional maintenance capacity.

SIA Engineering Company Stock Is A Surprising Hold

To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology.

When analyzing SIA Engineering, I actually had quite a good feeling about the company. There is strong demand for aircraft and engine maintenance and EBITDA is set to grow by 15.8% annually and free cash flow is expected to grow by 34% annually. However, when comparing the enterprise value to EBITDA, the multiple appears stretched and the company is fairly valued with FY26 earnings in mind. I do believe that in the years beyond, SIA Engineering could provide upside, but I do believe that stocks should trade only one year ahead of earnings and with that in mind, the stock is a hold.

Conclusion: SIA Engineering Company Stock Is Not Valued Attractively

While I certainly do like stocks that have exposure to the growing demand for aircraft and engine maintenance and SIA Engineering will see solid growth in both its EBITDA and free cash flow, the current valuation already reflects that at peer group valuation levels. The company could provide upside in the future, but for the moment, I remain on the sidelines and mark the stock a hold.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.