SINGAPORE (Sept 3): Singapore Technologies Engineering (ST Engineering) on Friday announced that its aerospace sector inked an agreement to provide CFM56-7B engine maintenance, repair and overhaul (MRO) services for the Boeing 737NGs belonging to Jet Airways and its subsidiary, JetLite.

This agreement is an add-on to an earlier contract that initially covers only a portion of the airlines’ 737NG fleet. Following this agreement, Jet Airways’ and JetLite’s entire fleet of 80 737NGs will be covered, increasing the contract value to US$700 million ($957 million), from US$350 million previously.

With this contract, CGS-CIMB is maintaining its “add” call on ST Engineering with a target price of $3.80.

According to analyst Lim Siew Khee, airline customers tend to be “sticky”.

This can be seen in the group’s relationship with Jet Airways, which started in 1993 with components MRO, and then extended to engine MRO in 2007. This current contract is the second longest extension for the group, which testifies to its quality.

The current contract entails an integrated suite of engine MRO solutions for six years from 2019.

Furthermore, the group’s aerospace division specialises in the MRO of CFM 56 3/5B/7B engines that power the narrow body A320 and B737 aircraft. These engines are reaching the heavy checks limit, which were expected to come in 2014 but were extended to 2017 due to better reliability.

The CFM56 engines can stay on wing for about 20,000 cycles, or about 9 years without removing the engine for heavy maintenance.

Post Global Financial Crisis in 2009, the group has delivered about 1,400 of the 56 series engines per annum.

“This means the engine heavy checks cycle will last until 2023 and peak in 2022, assuming a nine-year heavy check limit. With the Jet Airways contracts, STE’s engine cycle will stretch to 2024,” says Lim.

The analyst also says that heavy checks would bring about better margins for the group, as it saw a turnaround of 55-60 days with a price tag of around $5 million-6 million per check while light checks cost about $3 million-4 million per check with a shorter turnaround of several days or a week.

As at 11.25am, shares in ST Engineering are trading 6 cents lower at $3.28 or 4.28 times FY19 book with a dividend yield of 4.50%.