STEng – CIMB

All clear for take-off

US$750m MRO contract

Upgrade from Underperform to Outperform; raise target price to S$3.62 (from S$2.98). ST Aerospace has secured a US$750m (S$1bn) 10-year engine maintenance contract from low-cost carrier, Jet Airways India. This major contract is a positive indicator that the aviation industry recovery has kicked in. Our earnings estimates have been lifted by 2-3% for FY10-12 to incorporate the contract win. With a strong order book of S$12bn, we believe STE’s earnings growth can be sustained at 8-9% p.a. in the near term. We raise our target price to S$3.62 following our earnings upgrade, still using blended valuations. We fine-tune our valuation basis by using 18.5x CY11 P/E (5-year average) instead of 17x, 2% long-term growth (from 1%) in DCF in view of its better earnings outlook and lower dividend yields of 4.5% (from 5.5%), based on average yield during peak earnings growth in 2006-2007. We see stock catalysts from more sizeable contract wins and potential M&A growth.

The news

US$750m (S$1bn) maintenance contract. ST Aerospace has secured a maintenance-by-the-hour contract from Jet Airways (India) for the support of its CFM56-7B engines that power its fleet of 67 Boeing 737 aircraft. The contract will commence immediately and last 10 years.

Comments

Largest contract since 2006; S$11.9bn order book. This is the most significant contract announced by ST Aerospace since 2006 with the last sizeable win from Airbus worth US$635m for total aviation support for 12 years. With the win, STE has clinched about S$1.7bn worth of contracts YTD, bringing its order book to a record S$12bn (FY09: S$10.3bn). Our earnings estimates have been lifted by 2-3% for FY10-12 to account for the win. Given the strong order book, we believe earnings growth of 8-9% is sustainable. Upside potential could come from stronger-than-expected Aerospace margins, unannounced military contracts and any earnings-accretive M&A.

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