ST Engineering - CGS-CIMB Research 2021-07-03: Big And Agile


ST Engineering - Big And Agile

  • With US domestic travel heading towards pre-COVID-19 levels, we expect ST Engineering Commercial Aerospace to recover ahead of Singapore peer, SIA Engineering.
  • Airbus’s gradual production ramp-up is another driver for ST Engineering’s recovery as it benefits from nacelle and aircraft composite floor paneling production.
  • Order wins should remain strong for ST Engineering, judging from its 1Q21 achievement (S$1.5bn). Relative to its Singapore industrial peers, this is a positive.
  • We lift our FY21-23F earnings forecast for ST Engineering by 5-6% to reflect stronger recovery in aerospace and raise our target price for ST Engineering to S$4.41 (blended DCF, CY22F P/E, dividend yield).

Airbus’s gradual ramp-up in production of A320 family

  • ST Engineering Commercial Aerospace’s production of engine nacelle (US subsidiary, MRAS) and floor paneling (German subsidiary, EFW) is set to recover as Airbus gradually ramps up monthly production of A320 aircraft.
  • In May, Airbus guided its global suppliers that the group targets to increase A320 aircraft production to 45/month by 4Q21F (from current 40/month) and 64/month by 2Q23F. This is higher than 55/month in Feb 2020 during early stages of COVID-19. Airbus is also asking suppliers to prepare for a scenario of 70/month by 1Q24F and potentially 75/month by 2025F (pre-COVID-19 target was 60/month in 2019).

US domestic travel recovering to pre-COVID-19 levels

  • US Transportation Security Administration (TSA) expects summer travel volumes to rise. Average airport throughput in the US increased to ~75% of pre-COVID-19 levels (2019) in June. TSA said that many airports across the US are seeing passenger travel volumes of pre-pandemic levels with some already exceeding 2019 travel volumes, including popular summer travel destinations. This should lead to a pick-up in airframe MRO services in the US.
  • Relative to Singapore peer SIA Engineering (SGX:S59) which depends predominantly on Singapore Changi airport’s throughput and SIA load factor, ST Engineering’s presence in the US is the key differentiating factor for an earlier recovery to pre-COVID-19 levels, in our view.
    • We expect ST Engineering Aerospace’s revenue to reach ~86% of pre-COVID-19 levels in FY21F with the help of global operations in the US, Europe and China, in addition to the secular trend of passenger to freighter conversions.
    • We forecast SIA Engineering’s revenue to reach 61% of pre-COVID-19 levels by Mar FY22F (CY21).
  • ST Engineering’s aerospace bottomline improvement also depends on the group’s aggressive plan to drive cost efficiencies while SIA Engineering still needs to depend on its engine JV’s recovery (c. 40-50% of PBT pre-COVID-19).
  • We lift our FY21-23F earnings forecast by 5-6% on stronger revenue and margins for ST Engineering Commercial Aerospace. We think ST Engineering should recover ahead of SIA Engineering.

Best of both worlds – commercial and defence orders

ST Engineering's Investor day in 2H21F could be a catalyst

  • We like ST Engineering’s continuous efforts to reshape its business to cope with changes. In Nov 20, ST Engineering announced its aspiration to become a global technology, defence and engineering powerhouse by reorganising the group into two main clusters – Commercial and Defence & Public Security. We think this builds upon its 2018 strategy.
  • An investor day in 2H21F should fuel more interest and understanding of the group, in our view.
  • See the 17-page report attached below for complete analysis and ESG highlights of ST Engineering.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-03
SGX Stock Analyst Report ADD MAINTAIN ADD 4.41 UP 4.000