STEng – Phillip

Another Growth Engine

Company Overview

ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.

US$49.7mn for certain assets of Pemco

320k sqm of space, 1.4mn manhours of capacity, 2 hangars

B737 freighter conversion certificates acquired

16% increase in Group capacity

Maintain Accumulate with unchanged TP of S$3.37

What is the news?

STE announced the acquisition of certain assets of Pemco as part of a bankruptcy proceeding. STE’s US arm VT Aerospace would assume liabilities of US$6.2mn and pay a consideration of US$49.7mn for the Tampa facility and certain assets of PEMCO. The acquisition is contingent upon the approval by the US Bankruptcy Court and is expected to be completed in July 2012. The facility occupies 320k sqm of hangar and office space at Tampa International Airport in Florida and is seen as a gateway to Latin America. STE would also acquire the Boeing B737 freighter conversion Supplemental Type Certificates from Pemco in this deal.

How do we view this?

We view this development positively as it would further extend STE’s lead as the world’s largest MRO player. This deal would increase STE’s heavy maintenance capacity by 16% and increase its exposure to the fast growing Latin American region. While it is difficult to judge as to whether STE overpaid for the assets due to the lack of financial disclosures, bankruptcy proceedings usually throw up assets at a reasonable price.

Investment Actions?

We kept our forecasts unchanged and maintain our Accumulate rating on STE. STE’s earning yield spreads and P/E multiples remain below historical averages, reflecting undervaluation in this defensive stock, in our view.

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