ST Engineering - RHB Invest 2019-02-26: Aerospace Secures 10-year MRO Contract; Keep BUY


ST Engineering - Aerospace Secures 10-year MRO Contract; Keep BUY

Reiterate BUY with SGD4.10 Target Price, offering 8% upside and 4% FY19F yield.

  • SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering), one of our country’s Top Picks, announced that its Aerospace business signed an agreement to provide aircraft maintenance to a major North American airline company, an existing customer of ST Engineering.
  • The contract, valued at USD600m (c.SGD813m), will commence in 2020 and is for a period of 10 years. It will cover a fleet of over 160 wide-and narrow-body aircraft.
  • We continue to maintain that together with contributions from Electronics and improvements in Marine, the ongoing contributions from the Aerospace division will drive a recovery in ST Engineering’s profit growth in the near term. We view the likely completion of the MRA Systems acquisition by the end of 1Q19 to be a re-rating catalyst.

Reinforces STE’s leadership position in airframe MRO.

  • ST Engineering’s Aerospace arm is the world’s largest commercial airframe MRO service provider, a leading position it has enjoyed since 2002, based on a biennial ranking survey conducted by the Aviation Week Network.
  • The new maintenance contract from an existing customer, which includes the addition of a new aircraft type to be placed under ST Engineering’s care, reinforces the strong business capabilities that ST Engineering’s Aerospace division has built over the years.

A new facility in Pensacola will be used to service this order.

  • ST Engineering will be using its US-based facilities in San Antonio, Texas and Pensacola, Florida to provide airframe maintenance services to its customer. The Pensacola facility, which is currently under construction, is expected to be operational by 2022. This facility will have four aircraft hangers and is expected to increase ST Engineering’s MRO capacity by 2.1m man hours.

Contract win boosts an already strong outstanding orderbook.

  • ST Engineering reported an outstanding orderbook of SGD13.2bn, from which SGD4.9bn will be delivered in 2019. Based on rolling four quarters of reported revenue, the orderbook provides revenue visibility for two years. This order win should bring back some confidence amongst investors who were concerned with the 26% y-o-y decline in order wins reported by the Aerospace division in 2018.
  • During 4Q18 results analyst briefing, ST Engineering mentioned that baring the risk of a trade war escalation, it remains confident of witnessing a revival in aerospace order wins in 2019.
  • We maintain our view that in addition to inorganic growth contribution from MRAS, increased MRO capacity and capabilities in the aerospace sector will continue to support ST Engineering’s earnings growth over the forecast period.

Continuing on track for revival in earnings growth.

  • We expect the group to deliver c.13% earnings growth in 2019 (consensus: c.15%). Based on our estimates, much of this growth is expected to come from the Aerospace and Electronics divisions. However, we believe that improvements in Marine’s profitability will also be a factor in driving 2019 profit growth.
  • We have not yet factored the MRAS acquisition into our estimates, but assess that the acquisition could lift our earnings estimates 4-5$.

Shekhar Jaiswal RHB Securities Research | 2019-02-26
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