ST Engineering acquisition of MRA Systems at ‘attractive’ price with ‘huge growth potential:’ DBS

U.S. five dollar currency note; taken September 2018.

ST Engineering’s acquisition of MRA Systems is “an attractive price” for an asset with “huge growth potential,” DBS said in a note on Friday.

The Singapore-listed company said on Thursday that its wholly owned U.S. subsidiary, Vision Technologies Aerospace, entered a deal to acquire all of MRA Systems from General Electric for US$630 million, or around S$868 million.

“This deal will help the Aerospace division move up the value chain further into component OEM businesses, and helps STE to acquire significant intellectual property in advanced composites and other technologies and brings complimentary spare parts and component MRO opportunities,” DBS said.

‘Good bargain’

DBS estimated the deal price implied a 2018 price-to-earnings multiple of around 12 times, and the acquisition is expected to be earnings and value-accretive compared with ST Engineering’s current price-to-earnings multiple of around 19 times for this year.

“Based on the multiples that peers are trading at, we believe that the deal represents a good bargain,” it said, noting peers were trading at a median price-to-earnings multiple of around 19.0 times.

DBS also pointed to a “huge growth potential” for MRA Systems, due to the A320neo order backlog.

‘Huge growth potential’

“Given the favourable market dynamics and its position as a single-source nacelles provider for A320neo using LEAP-1A engines, we expect significant ramp up in MRAS’s nacelle unit deliveries in the coming years,” DBS said.

It noted that of the existing 6,068 orders for the A320neo, 38 percent, or 2,295 aircraft, will have the CFM LEAP-1A engine, indicating a “massive orderbook” of 4,590 nacelles, or two per plane, DBS said.

Another 35 percent of A320neo orders, or 2,150 aircraft, have not yet had an engine type selected, which could offer further growth potential if some of them opt for the CFM engine type, DBS said.

It noted the transaction is expected to be completed by the first quarter of 2019 and will be earnings accretive immediately.

DBS raised its 2019 and 2020 earnings forecasts by around 5 percent and 9 percent respectively to factor in the acquisition, adding it now expects strong double-digit earnings growth for 2019.

It raised its target price to S$4.30 from S$4.10, keeping a Buy call.

Shares of ST Engineering surged 7.29 percent on Friday to close at S$3.53.

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