Every cloud has a silver lining
- We see a healthy outlook for MRO providers in 2024F as issues faced by newer generation aircraft/engines could drive heavier work content, we think.
- SIE should benefit most in 2024F given ESA’s GTF expertise. Steady margin expansion over the coming quarters should re-rate the stock, in our view.
- STE is the longer-term play as strong US/China footprint and capacity additions should expand its global MRO market share.
- Key sector risks: labour shortages, supply chain issues. Upgrade SIE to Add with higher TP of S$2.70. Reiterate Add on STE with higher TP of S$4.36.
Airlines facing issues due to unreliability of newer equipment
We expect issues with newer generation aircraft and engines to continue to surface into 2024F, driven by 1) widespread recall of GTF engines, and 2) increased inspections of specific Boeing aircraft models (B737 MAX, B787). 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 (IATA projects record-high passenger volumes globally in 2024F) and continued delays in new aircraft deliveries from OEMs, we expect airlines to make up for lost capacity by extending the service life of older aircraft and reinstating inactive aircraft. This should drive heightened MRO demand in 2024-25F given heavier work content for older jets, presenting tailwinds for both SIE and STE ahead, in our view.
SIE: upgrade to Add on improving earnings outlook
We believe SIE is set for FY24-25F earnings boost from GTF issues as 49%-owned associate ESA could lead the inspection process for all Southeast Asia-based affected aircraft. We estimate GTF-related recalls could drive c.S$5m-10m in additional net profit p.a. for SIE over FY24-26F, premised on 1) ESA’s higher pricing power as airlines try to prevent excessive capacity disruption, and 2) gradual easing of supply chain woes driving increased engine induction volumes. We relook our EBIT assumptions and raise our FY25- 26F EBIT by 13-20% as stronger operating leverage and efficiency gains harnessed from transformation initiatives should help alleviate elevated staff cost pressures, in our view. With a more favourable earnings outlook and decent valuation of 17x CY25F P/E (1 s.d. below 2010-19 mean), we upgrade SIE to Add with a higher TP of S$2.70, based on 19.5x CY25F P/E (0.5 s.d. below 2010-19 mean).
STE: global presence accords stronger longer-term prospects
We think STE is well positioned to capture elevated MRO demand in the US and China, as they are regions with large proportions of affected A320neo/B737 MAX (details on page 11). Shifting market share in favour of LEAP engines could drive longer-term demand for STE’s engine MRO services in Singapore given the group’s positioning as the largest provider of end-to-end LEAP engine services in Asia. Improving PTF profitability is also a key driver of its aerospace segment margin expansion in the coming years, in our view.
