EUR 850.00 For Business Accounts Only

Morningstar | ST Engineering’s Purchase of GE’s MRAS Should Lift Our FVE to SGD 3.68

We think Singapore Technologies Engineering’s, or STE’s, purchase of MRA Systems, or MRAS, is positive, with returns looking to be accretive and cash flow contribution positive, leading to a rise in our fair value estimate to SGD 3.68 from SGD 3.60. Our revised fair value estimate factors in the ramp-up in the delivery of the Airbus A320neo, for which the nacelles produced by MRAS jointly with Safran are the sole source for the CFM Leap-1A engine. We also include MRAS’ underfunded pension into our fair value estimate, resulting in an adjusted cost to STE of USD 404 million versus enterprise value of USD 630 million. MRAS is being priced at 10 times EBITDA, which we believe is reasonable, as it provides STE with an established original equipment manufacturer of nacelles.

We believe additional upside is possible and have not quantified potential synergies to STE’s MRO activities in providing nacelles but assume medium-term sales growth of 4.4% for the time being, which is in line with the expected growth in air traffic. We also like the acquisition in that it is consistent with STE’s narrow moat rating, as we believe MRAS enjoys intangible benefits in its relationships with jet engine makers and probably switching costs from a safety perspective. The deal remains subject to approvals, but we are confident that it should complete as targeted by end-March 2019.

STE is funding the acquisition through cash and debt, but with the decent free cash flow at MRAS, we expect STE’s net debt/equity to comfortably peak at 0.32 times in 2019 and decline thereafter. As such, we see little impact to our expectation for dividends to remain stable. Hence, dividend yield remains attractive at over 4%, based on our fair value estimate.