The improvement in US airlines load factor is positive for STE’s aerospace division, which accounts for 50% of the Group’s top-line revenue and about a quarter of this is derived from exposure to US airlines. Delta, Northwest Airlines and US Airways are ST Aerospace’s long-term customers. With the improvement in load factors, the risk of airline bankruptcies has now eased, a key factor that had weighed down share price performance.

ST Aerospace announces 20-year engine maintenance aqreement with GE Aviation. This agreement is highly significant as it effectively provides long-term earnings continuity. Under the deal, ST Aerospace is to provide on wing support for two new engines, Genx-1B and Genx-2b. These engines will power the Boeing B747-8 and B787 aircraft that will be in service from late-09 and early-10 respectively. Both engines are GE’s fastest-selling engines with more than 1,100 engines sold to date.

ST Aerospace will see scheduled work on these engines from late-2010 onwards in both Singapore- and US-based hangars. Meanwhile, ST Aerospace will have to invest in machinery and acquire technical certification. No numbers were provided by STE, but engine maintenance is the most lucrative part of aircraft maintenance, accounting for 42% of total maintenance, repair and overhaul (MRO) expenditure, and Singapore is the largest MRO hub in Asia, controlling 25% of the Asian market. Asia is also the region with the largest orders for new aircraft.

Data on the number of aircraft under storage showed brief respite for two consecutive months. This is a positive sign, and given that it is coinciding with improved load factors in the US, suggests greater confidence among US airlines. This is a leading indicator as aircraft taken out of storage would typically require a three-month lead time before they are certified air worthy. As more aircraft are taken out of storage, this would translate into higher MRO revenue, a trend that will benefit ST Aerospace, which operates at a significant cost advantage in the US. Its MRO rates are 30-40% lower than that of competitors in the US.

We have not adjusted our 2010 numbers but have accorded a higher PE rating to the stock. The agreement with GE Aviation will provide long-term earnings continuity and cements STE’s position as a key MRO player with strong OEM links. Meanwhile, signs of improved load factor in the US along with a fall in the number of airlines under storage suggest that operational risk has eased. The company's orderbook now stands at $10.5b, the highest level in 10 years, but the stock is trading at a mere 0.72x price to orderbook, implying severe margin compression. This is unlikely to be the case as material costs have declined and MRO rates will stabilise given improving load factors. We believe a higher PE rating is justified and accord the stock a 16.5x rating, a slightly higher band than the historical low of 14.5x. We raise our 12-month price target to $2.83 from $2.40.