ST Engineering Sells 49% Stake in Shanghai Airframe MRO Joint Venture for RMB680.5 Million

Key Highlights of the Report

• Transaction Overview: ST Engineering, through its wholly-owned subsidiary ST Engineering Aerospace Ltd, has entered into an agreement to divest its entire 49% equity interest in Shanghai Technologies Aerospace Company Limited (STARCO) to China Eastern Airlines Corporation Limited (CEA).
• Sale Value: The total cash consideration for the sale is RMB680.5 million, equivalent to approximately S\$124.6 million. The payment will be made in two tranches:
  • First tranche: RMB506.7 million (about S\$92.8 million), payable upon completion of the divestment.
  • Second tranche: RMB173.8 million (about S\$31.8 million), payable by 31 December 2026, secured by a bank guarantee.
• Implied Valuation: The sale represents an EV/EBITDA multiple of 11.2x based on STARCO’s FY2024 EBITDA, reflecting a market-aligned valuation.
• Post-Transaction Ownership: Upon completion, CEA will own 100% of STARCO, consolidating its position in the Shanghai airframe MRO market.
• Financial Impact: ST Engineering expects a one-off gain of approximately S\$48.1 million from the divestment, based on STARCO’s carrying value of S\$60.2 million. The net proceeds of around S\$116.3 million will be used to pay down debt, leading to estimated annual interest expense savings of S\$4.2 million.
• Operational Impact: The divestment is part of ST Engineering’s ongoing rationalisation and expansion of its MRO facilities, with capacity in China, Singapore, and the U.S. remaining above pre-COVID levels.
• Non-Disclosable Transaction: Under SGX Listing Rules, the deal does not exceed 5% of the relevant financial metrics and is classified as non-disclosable. Nonetheless, the announcement was made for transparency.
• Transaction Timeline: The closing is expected in the next few months, subject to customary closing conditions.

Details for Shareholders and Potential Price Sensitivity

• Significant Cash Injection: The divestment brings in substantial cash, improving the Group’s balance sheet and reducing debt, which could positively impact ST Engineering’s financial health and future earnings.
• One-Off Gain: The deal results in a notable one-time profit of S\$48.1 million, potentially boosting reported profits for the current financial year.
• Strategic Realignment: The move signals ST Engineering’s focus on newer, more efficient MRO facilities and a shift away from legacy joint ventures, which may be seen as a positive indicator of management’s proactive strategy and potential future growth.
• Ongoing Customer Relationship: Although the partnership with CEA ends, ST Engineering remains committed to supporting CEA as a valued customer, indicating continued revenue opportunities.
• Minimal Impact on Core Earnings: The divestment is not expected to materially affect net tangible assets per share or ongoing earnings per share, apart from the one-off gain.
• Potential for Share Price Movement: The announcement of a significant divestment, immediate debt reduction, and a sizeable gain could be price-sensitive and may attract investor interest, especially given the company’s continued expansion and strategic shift.

In-Depth Transaction and Strategic Rationale

Established in 2004, STARCO has provided airframe maintenance, repair, and overhaul (MRO) services from its facilities in Hongqiao and Pudong, Shanghai. The joint venture with CEA was initially set for 20 years and extended in 2024. Both parties have now agreed to conclude the partnership to focus on independent growth plans.

Over the years, ST Engineering has strengthened its commercial aerospace footprint in China, with robust operations in Guangzhou and Xiamen, and a recently opened facility in Ezhou, Hubei. This facility is currently undergoing expansion, further positioning the Group to capture rising MRO demand in China and the broader region.

The divestment forms part of a broader rationalisation of MRO assets, aligning with ST Engineering’s plans to enhance operational efficiency and global competitiveness. Importantly, even with the sale of STARCO, the Group’s total MRO capacity remains above pre-pandemic levels, ensuring continued ability to meet customer needs.

Financial Effects and Outlook

• The Group’s share of STARCO’s net profit for FY2024 was S\$7.5 million.
• STARCO’s revenue is not consolidated, as the entity was equity accounted.
• Net proceeds of S\$116.3 million are earmarked for debt repayment, resulting in interest expense savings of S\$4.2 million annually.
• The transaction will deliver a one-off gain of S\$48.1 million for the current financial year.
• No material impact is expected on net tangible assets per share and ongoing earnings per share, apart from the one-off gain.
• Closing is anticipated in the coming months, subject to customary conditions.

Conclusion

This divestment marks a strategic shift for ST Engineering, unlocking capital, streamlining its MRO footprint, and delivering a notable gain. These factors could be price-sensitive, offering potential upside for shareholders and signaling continued evolution of the Group’s aerospace business.

Disclaimer: This article is for informational purposes only and does not constitute financial advice or a recommendation to buy, sell, or hold any securities. Investors should conduct their own research and consult professional advisers before making investment decisions.

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