ST Engineering - UOB Kay Hian 2021-07-06: Surging US Airline Capacity Bodes Well For Aerospace Earnings

SINGAPORE TECH ENGINEERING LTD (SGX:S63) | SGinvestors.io SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Surging US Airline Capacity Bodes Well For Aerospace Earnings

  • US airlines’ seat capacity as at end June was just 10% below that of pre-pandemic levels and this heralds a significant recovery in ST Engineering (SGX:S63)’s aircraft maintenance business. Prior to adding flights, airlines are required to perform return to service checks, particularly for aircraft that had been stored. The improvement in revenue and earnings could be seen in the upcoming interim results.
  • We raise our target price for ST Engineering by 4.7% to S$4.26. Maintain BUY.


WHAT’S NEW


Rebound in US domestic pax capacity bodes well for ST Engineering’s (STE) aircraft maintenance business.

  • The US, which has the third highest rate of vaccinations after Israel and Britain, could potentially reach herd immunity within four months. The optimism is reflected in US airlines’ seat capacity, which as at 28 June was only 10% lower than pre-pandemic levels, based on data from OAG. Much of the capacity was devoted to domestic routes and international capacity is relatively unchanged. But that could reverse in the coming months as the US had eased its travel warnings to 110 countries on 1 June. This could eventually lead to US airlines mounting international capacity, particularly on transatlantic routes.
  • ST Engineering has a large aircraft maintenance presence in the US and counts the big US airlines as customers. Airlines are required to fulfil regulatory maintenance after extended downtime, prior to return to service checks. This should benefit ST Engineering’s airframe maintenance business as well as their component and engine repair businesses.

Aerospace division likely to lead in earnings recovery, followed by electronics division.

  • We had already modelled in a recovery in aerospace sought-after 4G mobile services to rural sites across the region.
  • ST Engineering also announced a partnership with Intelsat, the operator of the world’s largest integrated satellite and terrestrial network to expand the provision of broadband services in the Philippines.


Share buy backs and insider purchases suggest growing optimism

  • Share buy backs and insider purchases suggest growing optimism of a recovery and likely continuation of S$0.05 in interim dividend payout.
  • Year-to-date, ST Engineering has purchased 3.5m shares at average price of approximately S$3.83.
  • We also believe that despite a reduction in Jobs Support Scheme (JSS), ST Engineering is likely to maintain dividend payout of S$0.15. At current ST Engineering's share price of S$3.90, that translates into a yield of 3.85%.


STOCK IMPACT


ST Engineering is our sole BUY in the Singapore aviation sector.

  • Given ST Engineering’s exposure higher than pre-pandemic levels.
  • We have raised our target price for ST Engineering to S$4.26, after raising our sustainable ROIC assumption from 13.1% to 13.2%.


EARNINGS REVISION/RISK

  • We raise our 2021 net profit estimate for ST Engineering by 1% to S$566m.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Already in place





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-06
SGX Stock Analyst Report BUY MAINTAIN BUY 4.26 UP 4.070



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