STEng – CIMB

Promising new convert

ST Engineering will be the first to develop a Passenger-to-Freighter conversion programme for the Airbus 330 aircraft with its recent collaboration. This will strengthen its position in the conversion segment, following its success with the Boeing 757 and 767 aircraft.

Maintain Outperform and target price (blended valuations). At 16x CY13 P/E, the stock is close to its -1 standard deviation of five-year mean. We see catalysts from a stronger-than-expected pick up in MRO contracts.

What Happened

ST Aerospace (ST Aero) has signed agreements with Airbus, EADS and Elbe Flugzeugwerke to collaborate on the A330 Passenger-to-Freighter (P2F) conversion programme. ST Aero will subscribe for new shares in EADS EFW (representing 35% of the enlarged capital)for Euro110.5m(S$186.6m). First re-delivery of the converted P2F is set for 2016. The conversions will be mainly done at EADS EFW’s facility in Dresden, Germany, but some work will be carried out at ST Aero’s facilities.

What We Think

We believe this venture widens ST Aero’s offerings following its success with Boeing’s 757-200, 757-300 and MD-11 P2F.Todate, ST Aero has completed 53 of the 87 units of B757-200 conversions for Fedex (order worth S$470m)and 63 units of MD-11 for Boeing. Its P2F order backlog includes the remaining 34 units from Fedex, 10 units of B767-300,and 15 new B757-200conversionssecured in 1Q12.

The latest collaboration also allows ST Aerospace to utilise EADS EFW’s facility in Germany (eight wide-body hangars) for MRO jobs. This enables STE to re-enter the European market after the closure of its Bournemouth facility in UK in 2006.

According to industry reports, Qatar Airways has expressed interest in gradually converting15-20 of its A330s into freighters. We believe such P2F contracts will materialise after the development phase (by 2014).

What You Should Do

Stay invested. We believe the company’s earnings growth and strong contracts momentum (S$1.8bn YTD) has not been priced in.

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