STE:SP Fair value – S$4.30
STE:SP Rating – Outperform
20 June 2017, Singapore – Singapore Technologies Engineering (STE:SP)’s ST Aerospace business division has already secured major contracts at the start of the 52nd International Paris Air Show 2017.
- BOEING B787 AIRCRAFT HEAVY MAINTENANCE CONTRACT FROM AIR CANADA
- AIRBUS A330-300 PASSENGER-TO-FREIGHTER CONVERSION CONTRACT FROM DHL EXPRESS
ST Aerospace contributes 54% of Singapore Technologies Engineering (STE:SP)’s profits.
BOEING B787 AIRCRAFT HEAVY MAINTENANCE CONTRACT FROM AIR CANADA
ST Aerospace’s fully-owned US affiliate, VT San Antonio Aerospace (VT SAA), secured a long-term contract to provide heavy aircraft maintenance services to Air Canada’s Boeing 787 aircraft fleet. The first B787 aircraft was inducted into VT SAA’s hangar in San Antonio for C1-checks in May and successfully redelivered within 18 days. Air Canada has 28 B787 aircraft in service with an average age of 1.4 years and another 9 on order.
ST Aerospace is the first MRO service provider in the Americas to perform heavy maintenance on the Boeing B787 aircraft and targets to establish VT SAA as a Centre of Excellence for the B787 in the Americas. We believe ST Aerospace is well-positioned to do so given its broad-ranging component MRO capabilities for the Boeing B787 aircraft:
- ST Aerospace is a UTC Aerospace Systems-licensed MRO service provider for the full range of nacelle components (including Inlet cowl, fan cowl, thrust reverser and exhaust nozzle) as well as air management and power generation & electrical system components for the B787’s Rolls-Royce Trent 1000 and General Electric GEnx engines.
- ST Aerospace is a Boeing-approved MRO centre for components work and has MRO capabilities that cover more than 450 individual part numbers, ranging from flaps, slats, leading edge and spoilers to ailerons, in all the major flight controls for the Boeing B787 aircraft.
The long-term revenue opportunity from doing heavy maintenance on the Boeing B787 aircraft is significant as there are 556 Boeing B787 aircraft in service plus another 664 aircraft on order globally based on the existing aircraft orders. The average B787 aircraft fleet age is only 2 years old at present but more maintenance work will be required as the fleet matures over time. 14% of all Boeing 787 aircraft in service and on order are deployed in North America and 36% in the Asia Pacific region.
Chart: Distribution of Boeing B787 aircraft in service and on order by region
AIRBUS A330-300 PASSENGER-TO-FREIGHTER CONVERSION CONTRACT FROM DHL EXPRESS
The improving global air cargo and favourable express freight market (see our previous report below) is reviving some interest in the passenger-to-freighter conversion market.
Even before the delivery of its first Airbus A330-300 passenger-to-freighter to launch customer DHL Express, Elbe Flugzeugwerke GmbH (EFW), which is ST Aerospace’s Dresden-based 55%-owned joint venture with Airbus (which has a 45% stake), has won another four Airbus A330-300 passenger-to-freighter (P2F) conversion contract from DHL Express.
This is in addition to the four A330-300 P2F contracts awarded by DHL Express during the Farnborough Air Show in July last year. The first and second A330-300 converted freighters are expected to be delivered by the end of 2017. DHL Express also has the option for another 10 A330-300 P2F conversions.
DHL Express believes the favourable payload and range metrics of the Airbus A330-300P2F aircraft will address an important air cargo market demand segment that is not currently served by any other aircraft type.
Chart: Elbe Flugzeugwerke GmbH (EFW) shareholding structure
EFW is also the exclusive supplier for composite flat panels to Airbus for all Airbus aircraft and serves as ST Aerospace’s Centre for passenger-to-freighter conversions, aircraft MRO and engineering services in Europe.
EFW just completed a new single-bay wide-body hangar in Dresden in order to take on the expanded conversion programme for DHL Express. ST Aerospace will also use its global network of facilities for some of the conversions to cater to the rising P2F demand and to ensure on-time delivery. Conversion work on the second A330-300 P2F aircraft is scheduled to start at ST Aerospace’s facility in Singapore.
There are 1238 Airbus A330-300 and Airbus A330-200 aircraft in operation with an average age of 8 years globally. Some of these could be converted into freighters when they are replaced by the new generation Airbus A350 aircraft.
Similarly, we expect ST Aerospace to win the smaller Airbus A320 passenger-to-freighter conversion contracts when the Airbus A320neo aircraft deliveries pick up speed in the coming years and replace some of the older Airbus A320ceo aircraft which can be converted into freighters. There are 4031 Airbus A320ceo aircraft in operation with an average age of 11 years. There are 79 Airbus A320neo aircraft in service in 2016 plus another 5108 Airbus A320neo aircraft on order to be delivered in the coming years based on the existing aircraft orders.
ST AEROSPACE WINS TWO AWARDS IN THE GLOBAL MRO INDUSTRY AS THE WORLD’S LARGEST COMMERCIAL AIRFRAME MRO SERVICE PROVIDER
ST Aerospace has recently won the prestigious Overall Maintenance, Repair & Overhaul (MRO) of the Year 2017 at the Aviation 100 MRO Global Awards hosted by Airline Economics in Dublin, Ireland. This award is based on the votes of thousands of industry professionals with judging criteria that include the number of aircraft and engines handled, the number of contracts secured and global existing and new MRO facilities planned.
In addition, ST Aerospace continues to rank first place as the world’s largest airframe MRO service provider in the Aviation Week Network’s biennial Top 10 Airframe MRO service provider ranking survey. ST Aerospace has ranked #1 for the last 16 consecutive years since 2002. The 2017 ranking is based on ST Aerospace’s total number of airframe maintenance man-hours of 12.5 million in 2016.
Going forward, ST Aerospace plans to go paperless, adopt collaborative robotics, fabricate aircraft parts through additive manufacturing methods and provide customised predictive analytics solutions. This will enable ST Aerospace’s customers to receive better real-time status updates of their aviation equipment under repair & maintenance, reduce cabin parts inventory by 3D-printing just-in-time cabin parts designed and certified by ST Aerospace, and benefit from predictive analytics solutions backed by ST Aerospace’s deep engineering expertise.
We view these developments positively and continue to be bullish on ST Engineering’s long-term growth prospects. ST Aerospace contributes 54% of ST Engineering Group profits. This business segment secured new contracts amounting to S$1.11B in 1Q17, up 51% y/y and 32% q/q, which will support its revenue growth in the next 2-3 years. The global MRO demand is likely to grow 5% per annum based on our forecasts, supported by the global and Asian airline sector’s average annual fleet growth of 6% from 2017 to 2021.
Chart: Global airline sector capacity growth (2016 to 2021)
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