Daiwa says Singapore aviation sector has room to soar

Singapore five-dollar note Photo by Leslie Shaffer

The demand for maintenance, repair and overhaul (MRO) services in Asia Pacific remains upbeat in the short-term, with Singapore’s MRO players in a prime spot to capitalize on growing demand, Daiwa said in a report last week.

The spike in demand for aviation aftermarket offerings is due to growing fleet additions amid delays in the aircraft retirement trend, but the market could get crowded, the note said. 

“The medium-term prospects for the industry could be clouded by operators adding capacity that could skew the demand-supply dynamics towards a glut in the early to mid- 2020s,” analyst Royston Tan said. “However, we believe the capacity increase by MRO operators is mainly to cater to strong projected growth in their affiliated-airline fleets.”

Daiwa added that Singapore will likely stay the preferred MRO services hub of the region, especially with the city-state’s recently launched roadmap for aerospace industry transformation. Singapore’s Seletar Aerospace Park is an industrial hub for aerospace activities with about 60 to 80 aviation-related SMEs and MNCs, and a training school to “nurture young talent” and ensure a ready-pool of skilled workers to address the industry’s potential labour shortage, the note said.

“We maintain our Positive rating on the Singapore aviation sector, with a preference for the aviation service providers (SIA Engineering, Singapore Technology Engineering and SATS) over airlines (Singapore Airlines) over the next two to three years,” the brokerage added.

SIA Engineering

Daiwa said it expected SIA Engineering’s revenue growth to be an “unexciting” average of 4 percent over 2019-21, but it also expected a margin rebound that could soon surprise the market. 

“The outlook for its engine MRO business through its comprehensive list of JVs/associates partnerships is particularly positive,” Daiwa said, noting the company would benefit from higher MRO demand from mature engines.

Daiwa has an Outperform call on SIA Engineering, with a target price of S$3.68 per share. Shares of SIA Engineering ended Friday up 0.31 percent at S$3.20. 

Singapore Technology Engineering 

ST Engineering faces headwinds from lower airframe MRO demand amid the adoption of new generation aircraft, Daiwa noted, adding that at the same time, its engine MRO capabilities don’t match up to SIA Engineering’s.

But it added, “the company’s diversification strategy into non-MRO work such as VIP fleet re-configuration and passenger-to-freighter (PTF)
conversion is more than sufficient to offset any weakness in its core-MRO business, on our estimates.” 

Daiwa forecast ST Engineering would generate a high, single-digit earnings compound annual growth rate (CAGR) over 2017-20.

It rates the stock at Buy with a target price of S$4.11; it closed Friday at S$3.67. 


Ground-handling and in-flight services provider SATS had “challenging” fiscal third quarter earnings, which were marginally below consensus estimates, because of SATS Hong Kong losses, Daiwa noted.

But Daiwa said it was keeping an Outperform call on SATS, because of its recent cost-cutting measures and expected improvements in its operating margin. 

“Looking ahead, SATS’s recent key partnerships with aviation parties such as AirAsia, Jetstar Asia, Turkish Airlines, will be instrumental in driving bottomline growth for the group over the next two to three years,” Daiwa said.

Daiwa has a target price of S$5.62 for SATS; the stock ended Friday up 0.39 percent at S$5.20. 

Singapore Airlines

Outside of the MRO sector, Daiwa noted that it recently upgraded Singapore Airlines to Hold from Underperform on stronger-than-expected carriage and passenger load factors for the first nine months of fiscal 2018.

“Despite positive air travel demand, SIA still faces pressure to keep ticket prices as competitive as possible in the face of low-cost-carrier proliferation. Consequently, we expect the group’s operating expenses to rise faster than revenue over the next two years, driven by jet fuel, parking and landing fees as well as higher depreciation costs,” Daiwa said. “Given our expectations for tepid earnings growth over fiscal 2018-20E (CAGR of 1.8 percent), we hence do not see justification for a strong valuation rerating.”

It set a S$11.73 target for SIA; the stock ended Friday up 0.46 percent at S$10.83.