STEng – DBSV

A boost to P2F conversion pipeline

A330 P2F programme on track. ST Engineering announced the finalisation of agreements with Airbus and its parent EADS to collaborate on the A330 Passenger-to-Freighter (P2F) conversion project. The initial agreement had been announced during the Singapore Airshow earlier in February. Under the final agreement, ST Engineering will invest about Euro 110.5m (S$186.6m) for a 35% effective stake in EADS EFW, the P2F conversion arm of EADS. EADS will hold the remaining 65% and will also have a call option over STE’s 35% stake during the engineering development phase of the A330P2F programme. The call option will expire when the engineering work is successfully delivered to EADS EFW. The engineering phase is expected to commence by end-2012.

ST Aerospace will be the engineering lead. ST Aerospace, with its engineering design experience, will be the lead during the engineering and development phase, while EADS will be the lead in terms of actual modifications and marketing. Most of the conversion works will be done at EADS EFW’s facility in Dresden, Germany, with the remainder coming to a dedicated ST Aerospace facility. The first converted aircraft is expected to come into service by 2016, with airlines like Qatar Airways already showing an interest in the programme. The larger A330-300P2F will be targeted at cargo integrators, while the A330-200P2F will be optimised for higher-density freight and longer-range performance.

Expands capabilities, potentially boosts associate profits. If this programme is successful, ST Aerospace will be the first independent MRO to have expertise in Airbus A330 conversions, and potentially other members of the Airbus family in future. This adds to STE’s industry-leading range of P2F capabilities, on top of its successful MD-11, B757 and B767 P2F programs running currently. EADS EFW will also serve as ST Aerospace’s European MRO center, which fills the only major gap in ST Aerospace’s global MRO footprint. While the investment is not likely to yield returns in the short term, STE’s strong balance sheet allows it the luxury to wait for associate profits to come in when the project is commercialised. EADS EFW has to date converted more than 170 freighters for 39 global customers. Its other projects include A300-600P2F and A310P2F. No change to our earnings estimates for FY12/13F. Maintain BUY with TP S$3.40.

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