These include stable staff costs, improving line maintenance earnings and higher JV and associate income or at least guidance along the same lines.
SIA Engineering’s stock price declined sharply following the recent selldown amid concerns over a 39 million stock placement and the removal of the stock from the Straits Times Index.
See: SIA Engineering tumbles 9% to 8-year low after JPMorgan seeks to sell entire stake in block trade
In a Tuesday report, UOB analyst K Ajith says he would like to see concrete improvements in certain key areas of SIAEC’s business.
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The first is stable staff costs. “Ideally, we would need to see at least two quarters of stable staff costs, to make a case for an upgrade,” says the analyst. Up to 50% of SIAEC’s opex costs are labour-related but the group is finding it harder to pass on costs, particularly for its airframe maintenance segment.
The second is higher line maintenance revenue. While SIAEC performs line checks at 37 airports in 8 countries, the bulk of revenue still accrues from Singapore. However, aircraft arrivals out of Changi rose by 4.1% in Jul-Aug period and this bodes well for strong 2Q revenue.
In June, SIAEC also begun line maintenance checks at Kansai airport. The group has also signed a non-binding MOU with Air India Engineering Services (AIESL) to perform line maintenance and ancillary services at six airports in India.
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See: SIA Engineering and Air India Engineering Services collaborate to provide MRO services in India
Finally, faced with greater competition, SIAEC has intensified its JVs over the past two quarters, forming JVs with Embraer, General Electric, Moog and Pratt & Whitney. While this is positive, Ajith says the JVs have relatively long gestation period. In FY17, JV and associate income rose just 2.4% y-o-y and growth was just under 2% in 1QFY18.
“SATS is our preferred pick in the aviation support services sector, given its relatively lower PE valuation and higher ROE,” adds the analyst.
As at 2.56pm, shares in SIAEC are trading 1 cent higher at $3.20.
