SIA Engineering Company Limited (SIAEC) announced yesterday the renewal of its comprehensive Services Agreement with Singapore Airlines (SIA), which supports SIA fleet with a spectrum of maintenance, repair and overhaul as well as fleet management support services.

This new agreement commencing 1 Apr 2015 is for a term of three years, with options to renew for three years and a further period of two years. This new agreement is expected to yield S$2.6b to S$2.9b in labour revenue over the eight-year term. However, it is not expected to have any material impact on SIAEC’s financial performance in FY16 since it is just a reestablishment of an existing arrangement.

While this is certainly good news for SIAEC over the longer-term, SIAEC is still facing the issue of deferred aircraft checks in the near-term, based on its 3QFY15 update, which we think could persist until end-CY15. Hence, we maintain our SELL rating on muted near-term outlook with an unchanged FV of S$3.80. Note that SIAEC is likely to announce its FY15 results on 12 May.

Source: OCBC Research - 16 Apr 2015