ST Engineering expects commercial aerospace’s full recovery before 2024 as Asian borders reopen

SINGAPORE Technologies Engineering ‘s (ST Engineering) commercial aerospace may have yet to reach pre-pandemic levels like its 2 other segments, but there are signs that “recovery is well under way” and hopefully will take place earlier than it expected.

This came as the mainboard-listed engineering heavyweight reported on Friday (May 13) a top line of S$2 billion for the quarter to March - on par with the corresponding period of FY2020, before the pandemic started to ravage global economies.

In its market update with media and analysts, ST Engineering said it is hopeful that recovery of the commercial aerospace to pre-pandemic levels can take place before its earlier forecast of 2024.

Vincent Chong, chief executive, noted that borders in the region have reopened and air travel has resumed, contributing to the recovery momentum. “And some of our colleagues have trouble booking flights for business travel, so we hope these are good signs that the recovery is well under way. And hopefully it can even be earlier than what we expected it to be, as articulated at Investor Day (in 2021).”

The commercial aerospace saw gradual recovery in maintenance, repair and overhaul (MRO) demand amid gradual reopening of borders in Q1, but strong passenger-to-freighter (PTF) conversion demand, with the hangars being booked through to as far out as 2026.

The component and engine MRO capacity utilisation rates now stand at about 80 per cent while that for airframe is “very, very full”, said Chong.

Jeffrey Lam, president of commercial aerospace, added that clients in Europe and the United States have recovered faster than those in Asia. He stated: “I can definitively tell you that we will see a good recovery in the second half. The final piece of the puzzle is really Asian countries’ borders opening. And we’re seeing clear signals from Asia…the borders are opening and this is going to help drive a definitive and steady recovery of the engine and component MRO business.”

On its PTF conversion, Lam said: “2022 is a big year for PTF conversions, we are actually doubling the number of aircraft inductions, and doubling the number of lines across all our sites around the world. And we do face challenges today, from raw materials, from supply chain challenges, from the availability of skilled labour. Nevertheless, we expect, given the maturity of the programme, as we gradually induct more aircraft that we will turn the corner of profitability by late this year.”

Also, Chong noted the impact of several major global events that sparked inflationary pressures and other challenges, but ST Engineering is addressing these by improving productivity and efficiency, working with customers on various alternative arrangements, diversifying  supply sources as well as taking pricing adjustments. Therefore, the impact on the group “is assessed to be not material at this time”.

Cedric Foo, chief financial officer, gave examples of how the group is tackling inflation and cost pressures, including cost escalation clauses in contracts that are tied to relevant indices and locking in costs with suppliers.

A total of S$2.4 billion worth of new orders were secured over Q1, with defence and public security registering the highest value of deals at S$1.3 billion. Commercial aerospace clinched S$900 million in orders, while urban solutions and satellite communications won S$200 million worth of contracts.

ST Engineering’s order book stood at S$21.3 billion as at end-March, including S$1.6 billion from US-based transportation technology company TransCore, acquisition of which was completed on Mar 17, 2022.

The acquisition is estimated to bear a weighted average financing cost of about 1.8 per cent for the first year. Some US$32 million of gains from the group’s recent financing exercise related to the acquisition will be held in the balance sheet reserves to reduce yields from future bond issues.

ST Engineering’s board has approved an interim dividend of S$0.04 per share, which will be paid out on Jun 7, 2022. 

The counter closed flat at S$3.98 on Friday, after the market updates were provided.