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Singapore Technologies Engineering Ltd’s Share Price Soared More than 6% Last Week: What’s Behind the Excitement?

Singapore Technologies Engineering Ltd (SGX: S63), part of the Straits Times Index (SGX: ^STI), is a global technology, defence and engineering conglomerate specialising in the aerospace, electronics, land systems and marine sectors. The aerospace business segment is the largest for the group, and competes against the likes of SIA Engineering Company Ltd (SGX: S59).

Last week, ST Engineering shares closed at S$3.53 apiece, up 6.3% for the week. On Friday (14 September) itself, its shares climbed 7.3%. In comparison, over the past week, the Straits Times Index added just 0.9%. With the massive rise in ST Engineering’s share price, many investors might be wondering: What is the reason behind the excitement?

The most probable cause for ST Engineering’s shares to soar is its positive announcement during the week.

Moving up the value chain

On 13 September, the conglomerate revealed that its US subsidiary, Vision Technologies Aerospace Incorporated, has entered into a US$630 million (S$868 million) deal to purchase MRA Systems (MRAS), a firm that makes aircraft engine parts. MRAS is currently wholly-owned by General Electric Company. It would be ST Engineering’s biggest acquisition thus far.

MRAS has 90 years of experience in the aviation sector and is an original equipment manufacturer (OEM) of engine nacelle systems for both narrowbody and widebody aircraft. An engine nacelle is the casing that houses an aircraft engine. MRAS owns intellectual properties and patents for nacelle system technologies.

ST Engineering mentioned in a press release that it has been on the lookout to invest in “new growth areas, including businesses that offer competitive products through the ownership of intellectual properties and that are synergistic to its core businesses.” The deal will allow it to scale up its aerospace capabilities by moving the company into the OEM business of high-value nacelle components and replacement parts.

There is growth ahead for MRAS’ business.

The company, together with Safran Nacelles, is a single-source nacelles provider for A320neo aircraft using the LEAP-1A engine option. MRAS has delivered over 500 Leap-1A units so far, and there are more than 6,000 A320neo aircraft ordered to-date. More than half of the aircraft purchasers have chosen their engine type, of which around 60% have selected their aircraft to be equipped with the LEAP-1A engine.

MRAS also provides nacelles for other aircraft types, such as COMAC’s C919 and ARJ21, and Bombardier’s Global 7000/8000.

The proposed acquisition is expected to be earnings accretive for ST Engineering. The purchase price translates to a multiple of 10 times MRAS’ EBITDA (earnings before interest, tax, depreciation and amortisation) for the 12 months ended 30 June 2018. The deal, subject to regulatory approvals, is expected to be completed by the first quarter of 2019.

Lim Serh Ghee, president of ST Engineering’s aerospace sector, commented:

“Moving upstream into the business of design and manufacturing of nacelles will allow us to benefit directly from the robust growth of the global aircraft fleet as an OEM, and enable us to serve our customers better through an enhanced suite of products and services. MRAS fits into this strategic intent given its strong portfolio of intellectual properties and programmes supporting high-growth aircraft platform such as the A320neo.”

The Foolish takeaway

To be sure, the deal has not been sealed as there are regulatory hurdles to go past. However, if the acquisition is given the go-ahead, it would be beneficial to ST Engineering’s aerospace business by allowing it to increase its capabilities and have the upper hand over its rivals. At the closing price of S$3.53, the conglomerate was selling at an enterprise-value-to-EBITA ratio of 13.5.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.