SINGAPORE (Oct 1): Sales from ST Engineering’s newly acquired Middle River Aircraft Systems (MRAS) is expected to rise by 10% in FY19 ending June.
Assuming that the acquisition is completed by 1Q19, UOB KayHian estimates that MRAS 2019 net profit contribution could reach $39 million or a 6.7% increase over its prior estimate.
To recap, MRAS' revenue consists of engine nacelle production and their thrust reversers, complex aero-structures for commercial and military aircraft as well as sales of spares and maintenance and repair and overhaul. Nacelle production is expected to account for at least 50% of revenue, according to UOB analyst K Ajith in a Monday report.
Production of leap 1A engines and nacelles are estimated to accelerate in 2019, as Airbus has a backlog of 6,040 orders on the A320 Neo.
Airbus has guided that aircraft production in 2019 will rise towards 63/month by mid-19, vs an average of 55 per month as at Aug 18.
Given that 60% of those who decided between the two engine options have chosen the Leap 1A, MRAS' production rate should theoretically rise at a faster rate than Airbus'.
The incremental nacelle production for Leap 1A should also more than compensate for the loss of mature nacelle production.
“Based on that, we have conservatively estimated 10% y-o-y growth in top-line for MRAS in 2019,” says Ajith.
For 2020, MRAS’ implied net profit growth, post acquisition, is estimated at 8.6%. UOB has also assumed 75% debt funding at a 3.9% interest cost. Even with new debt funding, gross gearing is estimated at 33% in 2019 vs 45% in 2017, due to an early redemption of US$500 million in medium-term notes in Jul 18.
ST Engineering will also amortise intangible assets (primarily IPs relating to the nacelles) of $380 million over a 20-year period.
As for dividend payout, Ajith says this will not be impacted having assumed that ST Engineering will fund the $606 million acquisition, via 75% debt.
And even if ST Engineering opts for a lower 50% debt, he believes the company will still be able to fund 2018's final dividend and 2019's interim dividend via operating cash flow.
For 2019, ST Engineering is expected to pay out 17 cents on 85% payout.
UOB is maintaining ST Engineering on “buy” with a higher target price of $4.06 or 20.5 times FY19F earnings and dividend yield of 4.2%.
Year to date, shares in ST Engineering are trading 9.1% higher at $3.57.
