STEng – BT

ST Engg sees new period of growth

Aviation industry slowdown could provide growth opportunities, it says

THE aviation industry slowdown could well turn out to be a blessing in disguise for Singapore Technologies Engineering (ST Engg).

In an interview with BT yesterday, the group’s president and chief executive officer, Tan Pheng Hock, said the impact of a slowdown in the aviation industry on the company was ‘minimal’ at worst and could even provide growth opportunities.

‘Today is the best time to look at acquisitions to get access to markets and technology,’ he said. ‘For the last four years we have been buying companies, and this period may well be a good opportunity to accelerate the plan.’

Mr Tan’s words came amid a fall in the share price of ST Engg, which at $2.77 yesterday was a dollar lower than at the beginning of the year. The price drop, which came amid market turmoil over the US sub-prime crisis, saw the stock shed 15 per cent in value in June alone.

Mr Tan said the slump in ST Engg’s share price could also be due to investor concern about the impact of a slowdown in the US aviation industry on its aerospace arm, ST Aerospace, which does third-party maintenance, repair and overhaul (MRO) work for airlines in Asia and the United States.

ST Aero contributes roughly half of ST Engg’s revenues and slightly more than half its profit.

But Mr Tan pointed out that fleet reductions in the US by ST Aero customers such as Delta and Northwest would have little impact on ST Aero.

He said the cutbacks were mostly in old fuel guzzlers, rather than the modern more efficient planes ST Aero was mostly servicing.

‘The impact, if any, is minimal if at all,’ Mr Tan said, adding that as the existing fleets get worked more heavily, maintenance needs may actually increase.

Another ST Aero customer, Federal Express, recently reported a quarterly loss and issued a profit warning, but Mr Tan said this could even be positive for ST Aero as FedEx is in the process of converting old Boeing 757s to freight carriers, meaning that ST Aero could book higher revenues from such conversion projects.

Mr Tan said he saw 20 per cent of the company’s revenue in future coming from converting passenger aircraft for freight purposes, citing an Airbus study predicting that freighter fleets will almost triple in the next 20 years.

And in the longer term, ST Aero will benefit as carriers find it more cost-efficient to outsource MRO work, he said.

MRO outsourcing is projected to grow from 52 per cent of the market last year to 73 per cent in 2017.

ST Aero has been linked with a US$1 billion deal to service Lion Air’s new fleet of Boeings.

Mr Tan confirmed ST Aero was interested and said it would be a good partnership. ‘We think they are very strong in this market, and they can leverage on our safety record.’

Analysts have lowered target prices and in one case downgraded the stock of ST Engg.

DBS Vickers analyst Janice Chua said in a research note that the company was fully valued with a 12-month target of $2.80, down from $3.50.

‘ST Aerospace’s earnings can be a key indicator on the group’s overall performance and share price tends to be more vulnerable to bad news in the aviation sector,’ she noted.

Leave a Reply