ST Engineering - RHB Invest 2020-10-28: First A321 Passenger-To-Freighter (P2F) Enters Into Service; BUY


ST Engineering - First A321P2F Enters Into Service; BUY

  • Reiterate BUY, S$3.90 Target Price, 7% upside with c.4% yield.
  • ST Engineering's share price returns have outperformed that of the STI Index, thanks to the defensive nature of its business – evident from two years of revenue visibility, relatively resilient 2020 earnings, and its ability to maintain dividend payments this year.
  • ST Engineering’s plan to grow its passenger-to-freighter (P2F) business, and the potential smart city order wins should be a long-term positive. We remain optimistic on 2021F earnings growth, which we believe, ST Engineering's share price is yet to fully factor in.

ST Engineering delivers first Airbus A321 P2F aircraft.

  • ST Engineering (SGX:S63)’s first A321 P2F converted aircraft entered into service on 27 Oct. Before COVID-19, c.50% of air cargo carried worldwide flew in the belly of passenger jets. However, a sharp decline in passenger aviation traffic has squeezed air freight capacity. Airlines are now flying cargo on empty passenger jets, by fastening boxes to seats or stripping the passenger cabins.
  • With the full recovery in passenger aviation traffic expected to take over three years, and the high availability of feedstock (ie under-utilised aircraft), the P2F business should see strong growth for next 2-3 years. In an earlier report: ST Engineering - RHB Invest 2020-09-21: Expanding Presence In P2F Business; BUY, we highlighted ST Engineering’s plans to increase its annual A321 P2F conversion capability from nine to 25 by 2023. In its 2018 investor day presentation, ST Engineering said it expects steady state annual revenue of more than S$400m from its P2F by 2022.

COVID-19 may be positive for Smart City business.

  • The pandemic has accelerated the need for digitalisation, and it is likely that globally, cities will witness an earlier-than-expected adoption of smart solutions. Ongoing investments into-and rolling out of 5G telecom networks, and continuing investments into IT infrastructure and urbanisation of cities will provide a strong base for the adoption of smart city solutions.
  • ST Engineering, which has a track record of more than 700 smart city projects in over 130 cities, could see strong order wins for its Smart City business in the next few years. ST Engineering could surpass the S$2bn of Smart City revenue target it expects to achieve by 2022.

Defensive business, sustainable dividends.

Shekhar Jaiswal RHB Securities Research | 2020-10-28
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900