• Capitalising on air traffic growth
• Collaboration on digital and connectivity
• Positive long term prospects

Positioning for Growing Air Traffic in the Region

ST Engineering (STE) recently announced that its Aerospace arm and Vietnam Airlines Engineering Company (VAECO), a subsidiary of Vietnam Airlines Co Ltd, have incorporated a new joint venture company, Vietnam Singapore Technologies Engineering Aerospace Co. Ltd. The JV will provide component Maintenance, Repair & Overhaul (MRO) solutions, and STE has a 49% stake in the JV.

Existing maintenance facilities of Vietnam Airlines at Noi Bai International Airport in Hanoi and Tan Son Nhat International Airport in Ho Chi Minh City will be leveraged upon, and new infrastructure will be invested in to carry out component MRO work at these facilities. The new component MRO facilities are expected to begin operations in mid 2019.

Collaborating on Enhanced Digital and Connectivity Solutions

In a separate announcement, STE also mentioned that it has entered into a partnership agreement with Nokia on key technology areas such as 5G and Internet of Things (IoT). The collaboration will allow both companies to cross sell their solutions and expand business offerings. STE will resell Nokia’s internet protocol (IP), optical networking and wireless broadband solutions which include 5G, last-mile and analytics. Nokia will in turn incorporate STE’s Very Small Aperture Terminal (VSAT) and cybersecurity solutions in its global project offerings.

Bright Long Term Prospects

YTD, STE’s stock is up 17.2% compared to the STI’s 4.5% rise, based on closing prices of 12 Jun. STE has had a good start to the year in terms of contract wins, which have increased its order book to a high of S$14.1b as at end Mar. About S$4.2b of this is to be delivered in 9M19.

Potential catalysts going forward include the US Postal Service’s tender for next-gen electric trucks, as well as the exercising of options for two polar security cutters by the US Coast Guard. We expect further growth in order book over the longer term with better traction in Smart City solutions and export of defence solutions. Meanwhile, we fine-tune our estimates and our fair value rises from S$4.22 to S$4.38.

Source: OCBC Research - 13 Jun 2019