SIA Engineering pressured to pull labour costs down

Almost half of its operating expenses are poured on labour.

SIA Engineering's (SIAEC) stock price has dipped recently to $3.60 amidst bearishness over the placement of 39 million stocks and the stock's removal from the FSSTI.

However, UOB Kay Hian said the firm should be able to work on three things before it determines whether it should be sold or not.

Firstly, SIAEC must narrow down labour cost increases, so as to serve as a catalyst for an upgrade.

"Ideally, we would need to see at least two quarters of stable staff costs, to make a case for an upgrade," UOB analyst K Ajith said.

About 50% of SIAEC's operating expenses are labour-related, and whilst these are shouldered by customers, the proliferation of maintenance, repair, and overhaul (MRO) shops in Malaysia, Indonesia, and the Philippines has curtailed SIAEC's ability to pass on costs, especially for its airframe maintenance segment.

In 1QFY2018, staff costs rose 6% YoY. UOB Kay Hian projected a 4.3% rise in costs versus a 0.5% revenue increase.

Aside from that, SIAEC also needs to work harder to get higher line maintenance revenue and earnings growth from its Air India Engineering joint venture (JV).

Whilst SIAEC performs line checks at 37 airports in 8 countries, the bulk of revenue still comes from Singapore.

UOB Kay Hian said revenue growth is thus directly proportional to aircraft movement out of Changi as SIAEC has about a 77% market share on line checks performed at the airport.

Its newly formed JVs with Embraer, General Electric (GE), Moog and Pratt & Whitney, will also need to improve in terms of income.

SIAEC's associate income rose just 2.4% YoY in 2017, whilst growth was just under 2% in 1QFY2018.

"For now, we believe that it will be difficult for SIAEC to surpass this hurdle," Ajith K said.