• Stay BUY and SGD5.32 TP, 14% upside, and c.3.5% yield. We stay positive on ST Engineering’s growth trajectory after it announced a new exclusive MRO contract from Akasa Air for maintenance of the LEAP-1B engines that power the Indian airline’s Boeing 737 fleet. The contract covers its existing 25 planes and yet-to-be-delivered 201 aircraft. Meanwhile a STE JV has re- entered the Airbus A380 airframe MRO market with a new customer while TransCore has landed a contract with Denver International Airport (DEN) to expand/modernise its ground transportation management system.

• New MRO contracts. STE has signed an exclusive 15-year contract with Akasa Air to provide MRO solutions for the LEAP-1B engines that power the airline’s Boeing 737 MAX fleet. The contract covers Akasa Air's current fleet of 25 aircraft plus the 201 planes it will receive over the next eight years. Meanwhile, STE and Airbus’ Elbe Flugzeugwerke (EFW) JV is re-entering the Airbus A380 MRO market, conducting airframe heavy maintenance services in 4Q24 for a new customer’s (Global Airlines) first A380 aircraft – this is to facilitate its entry into service. EFW will be responsible for all scheduled maintenance, including mandatory inspections and component replacements. It has also received A380 MRO orders from other customers and will expand its maintenance activities from 2025 for this aircraft type.

• TransCore’s new contract win. TransCore has secured a contract with DEN to expand and modernise the latter’s existing ground transportation management system. This upgraded system will help the airport improve commercial vehicle access control and revenue collection while improving traffic flow on its terminal’s roadways network. The system upgrade will also deploy leading tech for automated commercial vehicle identification, combining radio frequency identification and license plate recognition technologies to provide virtual queuing, automated taxi dispatching, and improved access control for commercial vehicles and transportation network companies entering passenger pick-up and drop-off zones.

• Unchanged positive investment thesis. We expect STE to deliver a 15% profit CAGR and steady dividends during 2023-2026. Its record order backlog of SGD27.9bn provides three years of revenue visibility. The growth will be aided by strong demand for aviation MRO services, sustained delivery of defence contracts, and a recovery in the Urban Solution & Satcom or USS segment. We see further earnings tailwind from interest rate declines, as c.39% of STE’s debt is exposed to floating rates. We estimate that a 100bps reduction in 2025 interest costs will boost profit by 2%. Our TP includes a 4% ESG premium over the SGD5.11 FV, given its 3.3 ESG score vs the 3.1 country median.

Source: RHB Research - 9 Oct 2024