SINGAPORE Technologies Engineering : S63 -1.08% (ST Engineering) on Wednesday (May 17) announced that its commercial aerospace business and SF Airlines &ndash a Chinese cargo airline &ndash have incorporated a new joint-venture company in Ezhou, in China&rsquo s Hubei province.

 

The company will operate a greenfield airframe facility at the Ezhou Huahu Airport to provide airframe maintenance, repair and overhaul (MRO) services to cargo and passenger airlines operating in Asia, including SF Airlines.

 

The first hangar facility is slated to be ready in 2025, ST Engineering said. 

 

The joint-venture company was set up with a registered capital of 100 million yuan (S$19 million). ST Engineering holds a 60 per cent stake in the company, and SF Airlines, the remaining 40 per cent. 

 

Jeffrey Lam, ST Engineering&rsquo s president of commercial aerospace, said China will be a &ldquo strong growth driver&rdquo for Asia&rsquo s commercial aerospace sector over the next decade. 

 

&ldquo A presence in Hubei, China, will enhance our MRO network in Asia to better meet and capture the rising regional demand, while our strategic collaboration with an airline partner will enable us to start up a greenfield operation quickly,&rdquo he added.  

 

The setup of this joint-venture company is not expected to have a material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year. 

 

ST ENGINEERING : S63 -0.82%on Monday (May 15) reported revenue of S$2.3 billion for the first quarter, up 13 per cent from S$2 billion the previous year.

 

In a business update, the defence and engineering group said its topline growth came as revenue in most business segments booked improvements over the quarter, and from contributions from transportation solutions provider TransCore, which it acquired in 2022.

 

Its board has approved a Q1 interim dividend of S$0.04 per share, which will be paid out on Jun 6.

 

Revenue from the urban solutions and satellite communications segment rose 46 per cent to S$434 million from S$297 million the previous year, following higher TransCore project deliveries.

 

But the segment&rsquo s revenue growth for the first quarter was affected by supply chain disruptions and project delays, the group noted.

 

Its commercial aerospace business posted a 29 per cent on-year increase in revenue to S$873 million from S$674 million in Q1 2022, attributed to the recovery of the aviation sector as borders reopened.

 

The group noted that its Q1 2023 revenue for the segment was higher than pre-Covid levels, as air travel recovered to more than 80 per cent of pre-Covid levels in January and February 2023.

 

Domestic travel reached near full recovery at 97 per cent, while international travel stood at 78 per cent, said the group. As China reopens, ST Engineering expects more growth in its commercial aerospace sector.

 

The group added that narrow-body aircraft production is expected to be strong over the next 10 years. ST Engineering manufactures nacelles for Airbus&rsquo A320neo fleet, which is projected to see growth. (*see amendment note)

 

Defence and public security revenue fell 8 per cent to S$982 million, from S$1.1 billion in Q1 2022. Excluding Q1 2022 revenue from the group&rsquo s US marine business, the segment&rsquo s revenue was up 1 per cent from S$968 million.

 

In November last year, the group proposed to divest all of its US marine subsidiaries &ndash VT Halter Marine and ST Engineering Halter Marine and Offshore &ndash to Bollinger Shipyards Lockport for US$15 million.

 

The group said a total of S$4.9 billion worth of new contracts was secured over Q1, with defence and public security registering the highest value of deals at S$3.3 billion. Urban solutions and satellite communications won S$823 million worth of contracts, while commercial aerospace won S$747 million worth.

 

ST Engineering&rsquo s order book stood at S$25.4 billion as at end-March. The group expects S$5.8 billion worth of contracts to be delivered over the rest of 2023.

RHB Bank Singapore' s Shekhar Jaiswal continues to call ST Engineering S63 -0.55% a " buy" , citing the defence and engineering conglomerate' s combination of defensive yield and strong earnings growth, which makes this a " special investment opportunity" .

 

However, because of revised financing costs assumptions, which will therefore weigh down earnings forecast slightly by 2%, Jaiswal, in his May 9 note, has trimmed his target price from $4.10 to $4.05.

 

According to Jaiswal, ST Engineering will see potential upside from its commercial aerospace segment, on the back of a recovery in global aviation traffic.

 

Its urban solutions segment will see " strong growth" from Transcore, its US-based traffic management systems unit.

 

In addition, the defence segment will benefit from higher spending in Singapore and in the US.

 

Jaiswal acknowledges that investors are worried about the company' s debt load, incurred to fund the acquisition of Transcore.

 

Nonetheless, he believes the concerns should be allayed by the company' s capacity to produce a significant free cash flow.

 

He expects a " gradual" drop in the company' s gearing from the current FY2023 to FY2025.

 

" We think that Moody' s recent reinforcement of its AAA issuer rating &ndash the highest rating level offered by the credit rating agency &ndash should allay investor worries about ST Engineering' s elevated debt levels," writes Jaiswal.