ST Engineering - To Benefit From Chinese Aviation Traffic Recovery
- ST Engineering (SGX:S63)’s aerospace business should see a strong recovery in MRO revenues amidst the earlier and faster-than-expected relaxation of China’s zero-COVID policy. While global demand for air cargo is tailing off, there are limited downside risks as its P2F conversion slots are fully booked until 2025-2026. Growth in other segments and contributions from new businesses should enable it to see an 8% profit CAGR in 2021-2024F.
- We like ST Engineering for its strong revenue visibility and defensive dividend outlook. BUY, S$4.15 target price, 20% upside, with ~5% FY23F yield.
China’s reopening should help revive aviation traffic.
- As per data from RadarBox, domestic aviation traffic in China has seen a strong rise since the start of this year, and the 7-day average (15-22 Jan) domestic flight traffic in China is already above the pre-pandemic levels recorded in 2019.
- China’s surprise decision to drop border curbs earlier (from 8 Jan onwards) has given the industry a boost, with some experts believing that the country reopening its doors to international travel could propel global air traffic back to pre-pandemic levels as soon as Jun 2023.
- While we remain optimistic about the outlook, we believe that some countries' reintroduction of tougher measures and COVID-19 testing for passenger arrivals will result in a more gradual recovery in international aviation traffic. China's aviation regulator wants passenger traffic to reach around 75% of pre-pandemic levels this year, from 38% in 2022.
Recovery in aviation traffic should boost demand for MRO services.
- The gradual reopening of China's aviation traffic should result in a much faster recovery in short-haul travel, particularly within the country and to neighbouring Asian and South-East Asian countries. A return to service checks and higher aircraft utilisation should boost MRO needs, which will be positive for service providers, especially in Asia.
- ST Engineering is the world's largest airframe MRO solution provider, with a strong presence in China and a greater exposure to narrow-body aircraft. The company offers airframe and engine services along with freighter conversions in China.
Still positive on growth outlook and steady dividends.
- ST Engineering's outstanding orderbook is at an all-time high of S$23.1bn, providing over two years of revenue visibility. Despite concerns on cost inflation and higher interest expenses, we believe ST Engineering will continue to pay 4 cents of quarterly dividend, implying a yield of ~5%.
- We continue to derive our target price using an average of P/E, P/BV, EV/EBITDA, and DCF. The target price of S$4.15 for ST Engineering includes an 8% ESG premium over the fair value of S$3.85.
Shekhar Jaiswal RHB Securities Research | https://www.rhbgroup.com/ 2023-01-19 2023-01-19
Previous report by RHB:
2022-11-30 ST Engineering - In Line 9M22 & Strong Order Wins; Keep BUY.