ST Engineering - RHB Invest 2020-11-26: New A330 P2F Order Wins; Keep BUY


ST Engineering - New A330 P2F Order Wins; Keep BUY

  • ST Engineering (SGX:S63) continues to register strong order wins, with new orders for two A330 passenger-to-freighter (P2F) conversion from CDB Aviation, an aircraft leasing company that is venturing into freighter conversion for the first time.
  • ST Engineering’s commitment towards cost optimisation and gradual demand recovery should drive earnings recovery in 2021. Moreover, its plans to reorganise its business should enable greater focus on future growth areas and support earnings beyond 2021.
  • We continue to like ST Engineering for its defensive earnings quality, ability to sustain dividends and deliver profit growth in 2021.

New A330 P2F order wins.

  • CDB Aviation, a wholly owned Irish subsidiary of China Development Bank Financial Leasing Co. Ltd, has entered into a partnership with Elbe Flugzeugwerke GmbH (EFW) for the P2F conversion of two Airbus A330-300 aircraft in 2021. These aircraft will be available for lease to CDB Aviation’s airline customers from early 2022.
  • Given the record-high freighter utilization, rapidly growing e-commerce demand, and higher cargo yields, CDB Aviation has been seeing an increasing interest from its customers for medium-sized freighters.
  • Elbe Flugzeugwerke GmbH (EFW) is a joint venture between ST Engineering and Airbus that offers freighter conversion services. In its 2018 investor day presentation, ST Engineering said it expects annual revenue of more than S$400m from its P2F by 2022. While the upfront R&D cost for new freighter conversions is high, margins should improve with rising order wins and aircraft deliveries.

Growing the P2F business.

  • In the 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 P2F conversion capability from nine to 25 by 2023. Previous news reports suggested that currently, all nine slots for P2F conversions in 2021 are full.
  • In its 3Q20 business update, ST Engineering reiterated the plans to grow its P2F business and highlighted that it plans to induct 18 aircraft for P2F conversion next year. Earlier retirement for large fleets of passenger aircraft has pushed feedstock prices lower.
  • P2F business not only generates revenue from direct conversion of the aircraft, but also creates opportunities for additional revenue from routine and non-routine maintenance needed on the modified aircraft. We remain positive on the recovery in ST Engineering’s aerospace business in 2021 and beyond.

Defensive business, sustainable dividends.

Shekhar Jaiswal RHB Securities Research | 2020-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 4.400 SAME 4.400