ST Engineering

ST Engineering: CIMB maintains O/p with $3.87 TP. House note that in recent road show to HK, STE busted a few myths, including that of lower MRO demand from new aircraft joining the aviation industry and the adverse impact of cuts in global defence budgets on STE’s defence business. Mgt clarified that although newer planes could be equipped with higher composites that would require lesser maintenance of airframes, the bulk of the global fleet is still built on older technologies, making MRO an integral expense for operators. Secondly, STE is gaining MRO market share in the US, thanks to an exodus of competitors such as Air Canada’s in-house MRO, Aveos, PEMCO World Air Services, American Airlines’s internal MRO and Aviation Technical Services. Finally, STE’s proven capabilities in different classes of aircraft could allow the group to capture strong demand for freighters. Airbus forecasts that about 1,800 conversions would be needed by 2022. Overall, house like STE for its $630m war chest, above-peers ROEs of 30% and generous payouts of 90%, sustaining yields at 5%, backed by a $12.7b orderbook. Catalysts include M&As and stronger Aerospace margins.