Labour cost inflation to moderate ST Engineering’s P2F business

The firm is experiencing a labour shortage of c.10%.

ST Engineering is still facing labour shortage and inflation due to the supply chain challenges, which could affect its passenger-to-freighter (P2F) business, RHB Bank, said.

In its brokerage report, RHB highlighted that there could be a likelihood of some moderation in the P2F business in the near term.

“ST Engineering is experiencing a labour shortage of c.10% vs what’s needed and a labour cost inflation of high-single to double digits. With respect to contract price readjustment in response to rising costs, STE noted that it has an option for price escalations in older contracts,” RHB’s analyst said.

“However, historically airlines have preferred a fixed price escalation and for contracts that have variable price escalation, the escalations tend to be capped,” the analyst added.

RHB still has a positive outlook for ST Engineering as the firm continues to ramp up its capacity.

For ST Engineering’s interest expenses, RHB said it could get higher from 2023 due to increasing rates. 

RHB lowered its 2022-2024 earnings outlook for ST Engineering by 3% to 4% but it said it is confident of the engineering firm’s defensive business.