CFA Society Singapore
SINGAPORE (Sept 14): Shares in ST Engineering surged 22 cents or 6.7% to $3.51 this morning after Thursday night’s news that the defence and engineering company was acquiring MRA Systems (MRAS) for a record US$630 million ($864 million) drew positive responses from analysts.
As at 1.29pm, nearly 14.5 million shares were traded, making ST Engineering the sixth most actively traded stock for the session so far.
In a report by CIMB-CGS Securities, analyst Lim Siew Khee thinks the acquisition of the nacelle systems manufacturer could boost ST Engineering’s profit by 8-12% in FY19-20, conservatively.
An engine nacelle is the casing that houses an aircraft engine, providing efficient aerodynamics during flight and thrust reversal capabilities. Each passenger aircraft needs two units at least.
MRAS, which is currently owned by General Electric Company (GE), is a single-source supplier for the new-generation A320neo aircraft powered by the next-generation CFM LEAP-1A engines. More than 6,000 A320neo aircraft have been ordered to date, of which 2,300 are to be equipped with the LEAP-1A engine.
Lim says MRAS generated $33 million net profit in 1H18. Revenue for the 12-month ended Jun 2018 was $723 million. Its 1H18 net margin of 9% is comparable to STE’s existing aerospace margin.
“On an annualised basis, we expect MRAS to contribute $45 million, or 8% to group earnings in FY19. Assuming a gradual ramp up of 20% in FY20F, group earnings will rise $80 million, adding another 12% to our current forecast. In a bull case of 40% ramp up, profit for MRAS could rise to $92 million in FY,” says Lim.
In a separate report, DBS Group Research analyst Suvro Sarkar says the pricing of the deal is fair at around 12 times forward FY18 earnings, compared to peers’ 19 times earnings, especially given strong growth potential, driven by A320neo engine nacelle system program, with 40-50% ramp-up potential for that programme in the near term.
“The transaction is expected to be completed by 1Q-2019 and will be earnings accretive immediately. We raised our FY19/20 earnings by around 5%/9% to factor in the acquisition, and now expect strong double-digit earnings growth in FY19,” says Sarkar.
DBS is lifting its target price to $4.30 in the light of earnings revisions and is based on a blended valuation framework, which factors in both earnings growth and long-term cash-generative nature of ST Engineering’s businesses.
However, CGS-CIMB is keeping its forecasts for now, pending the transaction’s completion.
“If we factor in our base case expectation of 8-12% FY19-20 EPS uplift, our target price would rise to $4.13 upon the acquisition’s completion. Successful deal completion is a potential key catalyst,” says Lim.