ST Engineering Aerospace moves up value chain with MRAS acquisition
ST Engineering sees its aerospace arm’s acquisition of US-based nacelle manufacturer Middle River Aerostructure Systems (MRAS) as a key step in its move to go upstream in the aerospace value chain.
ST Aerospace has a formidable reputation as a maintenance, repair and overhaul (MRO) player, but as competition in the market stiffens, it is trying to gain a foothold in the original equipment manufacturer (OEM) space.
With the acquisition, which was completed in April, ST Aerospace is now able to provide services ranging from design and engineering to manufacturing.
“With many OEMs coming into the MRO market, we find that we need to get a stronger foothold, which means moving up the value chain and doing more original equipment,” says Jeffrey Lam, deputy president, ST Engineering Aerospace, in an interview with
“We are big on airframe maintenance, which means we maintain and repair aircraft structures, cabin interiors and avionics. For example, we refurbish our customers’ cabin interiors, [and] we already put other people’s equipment into our customers’ aircraft, so why wouldn’t we consider developing our own equipment?” he adds.
ST Aerospace has developed equipment ranging from aircraft cabin interiors to seats that its customers can choose to outfit their aircraft. Its expertise in airframes meant that the acquisition of MRAS was synergistic, as nacelles — which are essentially engine covers — are largely about airframe structures, according to Lam.
Ascending the value chain
MRAS is not ST Aerospace’s first foray into the OEM market, having started with cabin seats. The company does not have any customer in Singapore for its cabin refurbishment products, as Singapore carriers have their own in-house capabilities, Lam notes. However, it has a large customer base outside of Singapore and Asia.
“We have huge maintenance bases in the US, Europe and China to tap these markets easily. The cabin interior market is an area close to the bespoke requirements of these airlines, and you need to work with them to develop something to differentiate their product,” he says.
The company plans to expand this business. As with aviation, this business faces many technical and regulatory hurdles, as the seats need to be certified by the various aviation authorities.
“The market is also well anchored with established players. We continue to advance our certification programme and secure more customers. We recently achieved the European Union Aviation Safety Agency certification for our seats on the A320 and are looking for additional certification,” says Lam.
He says with MRAS, the company can now compete for a share of the OEM market, which requires managing the spare parts, providing 24-hour customer support, materials and technical support — something ST Aerospace did not necessarily need as an MRO player.
The acquisition of MRAS also means ST Aerospace is engaging aircraft OEM players earlier at the design stage of the nacelles, instead of later as an after-market service provider.
“In many ways, we have to engage both the engine OEMs and the aircraft OEMs. If you design a good nacelle, [you get] better fuel efficiency, better fuel burn and better noise attenuation because now, the global authorities have noise limits for airports. All of those features have complex engineering requirements, so it is good that we are fully engaged in these areas,” explains Lam.
GE roots
MRAS was a subsidiary of General Electric and provided nacelles for GE engines. Its ties to GE meant it did not supply to other engine manufacturers. Now, under ST Aerospace, it is seen as an independent company. “We are already engaged [in discussions] with multiple parties, both aircraft and engine OEMs, to look for more opportunities for our products,” Lam says.
He adds that being owned by an Asian company puts MRAS in a good position — geographically and culturally — to tap the market for emerging Asian aircraft, such as the Chinese Comac aircraft.
Moving ahead, ST Aerospace is on the lookout for companies it can add to its portfolio. “Yes, we are still hunting for more, but it has to be the right ones, the more impactful ones. Not too small that it won’t make a difference and not too big that we can’t handle it; so, something in the range of what we did with MRAS,” says Lam.
Elsewhere, ST Aerospace’s aircraft leasing business has not taken off as quickly as the company had hoped.
“It’s almost embarrassing that we started the business a while back, and it hasn’t moved as fast as we liked. I think it’s because the market is flush with liquidity. More than that, we are very selective on the right aircraft portfolio that will have synergies with what we do — for example, can we offer maintenance packages for the aircraft that’s leased?” says Lam.
The engine leasing business, on the other hand, has performed better, with its engine portfolio having reached 40 engines. “We are looking to continue to grow the leasing business; we think it is an important aspect of the value chain. It is supporting our customers in financing the assets they want to own and operate, so it’s somewhere in between the OE[M] business and the MRO business, and here we want to make a difference to customers that we can work with,” said Lam.
Aerospace flying high
While much has been written about how the group’s electronics arm ST Engineering Electronics is riding the smart city trend, the aerospace division has an advantage that will pay off in the long run. Aviation is a stable, long-term business driven by fundamentals, says Lam. Short-term upheavals such as the Boeing 737 MAX groundings will even out in the long term.
“[It’s] a long-term trend of growth that is driven by air travel and cargo demand. The trend of aircraft retirements and new aircraft with new technologies — we expect all that to come into play.
“In aerospace and aviation’s economic cycles, you expect to see long-run cycles. We’ve been in a golden period for quite a long time — the industry makes money, the airlines make money [which] means the aircraft makers make money, oil prices are low and airlines are managing capacity quite well. So we see these long-term trends as favourable, any economic shocks will be short-term and the long-term aviation growth trends will remain,” he adds.
ST Aerospace is positioning itself to take advantage of these long-term trends. A key strength is the fact that it works together with customers to create bespoke solutions. “That is something many MROs out there don’t do well. We go that extra mile to make a difference,” Lam says.
The performance of ST Engineering’s aerospace division helped lift the company’s results for 3QFY2019 ended Sept 30. While revenue rose 27% y-o-y to $2 billion, with all divisions seeing revenue increases, earnings growth was driven mainly by aerospace and others. Earnings grew 3% to $139.1 million on the back of a 9.6% increase in aerospace earnings to $65 million and “others” reversing from a loss to a profit of $4.1 million. The company’s record order book of $15.9 billion will keep it busy for the next few years.
Revenue growth generated by the aerospace business can be attributed largely to new contribution from MRAS. Net favourable impact from end-of-life programme reviews and recognition of tax credit were other contributing factors. The impact from end-of-life programme reviews is generally positive, said Lim Serh Ghee, president of ST Engineering Aerospace, at ST Engineering’s results briefing on Nov 11.
“Look at the business segment rather than a particular area. If you look at it over the years, that is more meaningful than focusing on one particular quarter where there is this spike, which is high for this particular quarter. I would say we are tracking the historical average,” says Lim.
The results have given analysts reason to feel bullish about the stock. Four have issued “buy” calls. DBS Group Research analyst Suvro Sarkar sees positives for ST Engineering stemming from its inorganic growth potential from recent acquisitions, near-term organic growth from an increase in workload from engine MRO shops, and the ramp-up of Airbus’ passenger-to-freighter programmes, among others.
“Continued initiatives by ST Aerospace to broaden its capabilities should propel its growth in the longer term,” writes Sarkar in a Nov 12 report. He has a “buy” call, and is maintaining a price target of $4.64.
Lim Siew Khee, an analyst with CGS-CIMB, has an “add” call, and has raised her price target to $4.47 from $4.36 previously. While she is optimistic on the counter, she has tempered expectations for the aerospace division, paring back her earnings growth forecast from 20% to 14%. E