RHB Group Research analyst Shekhar Jaiswal has maintained “buy” on Singapore Technologies Engineering (ST Engineering) with a target price of $4.15, expecting the company’s aerospace business to see a strong recovery in maintenance, repair and overhaul (MRO) revenues.
This is amidst earlier and faster-than-expected relaxation of China’s zero-Covid policy which should help revive aviation traffic, says Jaiswal in his Jan 19 report.
Citing data from Radarbox, Jaiswal notes that domestic aviation traffic in China has seen a strong rise since the start of the year and the seven-day average domestic flight traffic in China is already above the pre-pandemic levels recorded in 2019.
“China’s surprise decision to drop border curbs earlier 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 June 2023,” he adds.
While RHB remains optimistic about the outlook, Jaiswal believes 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.
Jaiswal highlights that China's aviation regulator wants passenger traffic to reach around 75% of pre-pandemic levels this year, from 38% in 2022.
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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 Southeast Asian countries, says Jaiswal. 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,” he adds.
RHB is still positive on ST Engineering’s growth outlook and steady dividends. Jaiswal says that the company’s order book is at an all-time high of $23.1 billion, providing over two years of revenue visibility.
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“Despite concerns on cost inflation and higher interest expenses, we believe ST Engineering will continue to pay 4 cents of quarterly DPS, implying a yield of about 5%,” says Jaiswal.
As at 9.39am, shares in ST Engineering are trading 1 cent higher or 0.28% up at $3.51.
