ST Engg net profit rises 8.9% to $92.8 million in Q1

SINGAPORE Technologies Engineering (ST Engg) yesterday reported first-quarter net profit rose 8.9 per cent to $92.8 million, from $85.2 million a year ago.

This was on the back of a 3.2 per cent increase in sales, to $1.36 billion from $1.32 billion last year. The company, which is in defence, aerospace and marine engineering, said it had a record order book of $11.8 billion as at end-March, with some $3.2 billion or 27 per cent of that expected to be delivered this year.

All the group’s arms reported stronger operating profit, resulting in earnings before interest and tax growth of 25 per cent to $110.9 million, ST Engg said. Earnings per share were 3.08 cents for the quarter, up from 2.84 cents a year ago. ‘Barring unforeseen circumstances, the group expects to achieve higher turnover and profit before tax for FY2010 compared to FY2009,’ said president and chief executive officer Tan Pheng Hock.

While the group’s aerospace division reported marginally lower sales, pre-tax profit rose 7 per cent due to a favourable sales mix and lower financial expenses from recognition of fair value of an interest rate swap, ST Engg said. The electronics arm posted 8 per cent or 25 per cent higher sales on the back of milestone completions of the Circle Line MRT project as well as rail projects in Guangzhou and Taiwan and 29 per cent higher pre-tax profit, partially offset by lower income from the Jobs Credit Scheme.

Sales in land systems gained 7 per cent or $18 million, while marine posted 9 per cent or $22 million more in sales from higher engine repair activity offset by lower ship repair turnover.

However, quarter-on-quarter, all four divisions recorded a total of some 21 per cent or $30.3 million less in pre-tax profit, largely due to lower quarter-on-quarter sales figures.

ST Engg shares closed unchanged yesterday at $3.13.

ST Aero bags US$105m China airline contract

It’ll service A320 jets of Spring Airlines in eight-year deal

IF there is one company that is on a roll, it has to be ST Aerospace. The ST Engineering unit yesterday announced another contract win – this time a US$105 million deal with Shanghai-based budget carrier Spring Airlines for component maintenance-by-the-hour (MBH) services.

The news comes just days after ST Aero announced one of its biggest-ever single deals – the 10-year US$750 million MBH contract with India’s Jet Airways.

Under the Spring Airlines deal, ST Aero will provide maintenance, repair and overhaul services for the carrier’s current fleet of 15 Airbus A320 aircraft, which will grow to 78 of the same type.

The contract starts this month and will last eight years. It also includes setting up a warehouse at Spring’s base at the Pudong International Airport. The airline already has a warehouse at its base at Hongqiao International Airport. The new warehouse will allow easy access to component consignment services at Pudong.

ST Aero’s relationship with Spring began in 2005 when it secured an MBH contract to provide component services, including component maintenance, repair and overhaul, pool access and consignment services. Since then, ST Aero has also provided airframe services, seats and slides overhaul and aircraft-on-ground and tapped on its aviation logistics facility at Guangzhou to provide import, export, warehousing and logistics services of components.

The latest contract underscores the popularity of ST Aero’s MBH offering, especially for narrow-body Boeing 737 and Airbus A320 aircraft. ST Aero is providing engine and component support for more than 650 aircraft on an MBH basis for a large number of airlines.

Spring is one of China’s pioneer low-cost carriers. Established in 2005 by Spring Travel, China’s domestic travel agency, it started operating with three Airbus A320s. Today it operates out of Shanghai’s Hongqiao and Pudong airports as well as Sanya’s Fenghuang Airport, serving more than 50 routes within mainland China. It hopes to go international this year.

ST Aerospace clinches S$148m contract from Spring Airlines

ST Aerospace, a unit of ST Engineering, has clinched a S$148 million contract from Spring Airlines.

This comes hot on the heels of a S$1 billion maintenance deal signed with Jet Airways on March 31.

The latest agreement will see ST Aerospace expanding support services to Spring Airlines’ fleet from 15 to 78 aircraft.

It will cover mainly component services and also the setting up of a new warehouse at Spring Airlines’ base at the Pudong International Airport in Shanghai.

The new contract will commerce in April 2010 and stretches over eight years.

Outlook improving but valuations still demanding

• STE announced on that it has been awarded a ten-year engine maintenance contract by Jet Airways.

• The contract is worth US$750 mn (S$1.0 bn) and will commence immediately. The company does not expect this contract to have any material earnings impact this financial year.

• YTD, STE has secured new contracts worth S$1.8 bn, versus S$3.7bn of the order book (of S$10.3 bn as of December 2009) expected to be delivered in 2010.

• We adjust our revenue assumptions mainly to reflect a more favourable demand outlook. Overall, we raise our FY10E and FY11E net earnings by 2% and 9%, respectively. However, we cut our dividend forecasts to reflect a lower payout ratio. We also raise our DCF-based target price from S$2.37 to S$2.68 (implied P/E of 17x).

• Despite the stock's underperformance and improved outlook, STE remains expensive, in our view. At S$3.19, the stock is trading at a 2010E P/E of 20x. Our target price of S$2.68 represents 16% potential downside from here. We maintain our UNDERPERFORM rating.

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.