• BUY, SGD4.80 TP, 16% upside with c.4% yield. ST Engineering has signed a 5-year deal with Safran Aircraft Engines (SAE) to provide engine maintenance (shop visit) offload for the CFM56-5B and CFM56-7B engines. As these engines are used on narrow body aircraft, we believe the agreement will allow STE to benefit from the expected revival in global air travel. We believe it should be able to deliver defensive earnings growth, aided by revival in the aerospace business. Key catalysts: Sustained strong contract wins, a faster revival in the aerospace business.

• Aircraft engine maintenance agreement with SAE. STE will provide engine maintenance (shop visit) offload for the CFM56-5B and CFM56-7B engines. The CFM56-5B engine was originally designed to power the A321 (Airbus 321) aircraft, but now can power every model in the A320 family. Similarly, the CFM56-7B engine powers the Boeing 737 (B737) Next Generation-600, -700, -800 and -900 aircraft. Both these aircraft are of narrow-body types, and are the workhorses of most global airlines for short- to medium-haul distances. STE’s engine maintenance, repair and overhaul facilities in Singapore and China have a combined annual capacity of over 450 engines, and a track record of redelivering over 1,500 CFM56 engines. Earlier, the company expanded its CFM engine capability with the setting up of quick-turn services for the LEAP-1B engine, which powers the B737 Max. This multi-year agreement should allow STE to benefit from the expected pick-up in engine MRO activities, as air travel recovers from the pandemic.

• Record-high orderbook lends revenue visibility. STE reported SGD2.4bn worth of order wins in 1Q22 (+54% YoY, -25% QoQ). Its orderbook has now reached a record high of SGD21.3bn (Figure 2), implying more than two years of revenue visibility. STE expects SGD5.8bn of the order\book to be realised as revenue in the last nine months of 2022 (or 94% of our revenue estimate).

• Earnings growth and sustainable yield. The company has not committed to pay 4 SG cents of quarterly dividends, implying an annual DPS of SGD0.16 (vs SGD0.15 during last few years). This implies a dividend yield of c.4%. In addition, we expect STE to deliver 7-11% profit growth over 2022-2024F, aided by consolidation of its recently completed Transcore acquisition, the gradual execution of its orderbook, tailwinds from the global economic recovery, and its ability to better manage costs and boost productivity. Our SGD4.80 TP includes an 8% ESG premium over the fair value of SGD4.45.

Source: RHB Research - 10 Jun 2022