Here's why ST Engineering must keep an eye on its aviation activity

Its aerospace segment is ~42% of profits.

According to Nomura, STE’s aerospace segment contributed ~42% of PBT in FY12. We estimate that ~80% of the aerospace segment revenues come from non-defense commercial clients.

This implies that 20 – 30% of PBT is a result of MRO demand from commercial airlines. As such a reduction in commercial MRO demand will have a significant impact on earnings.

Here's more from Nomura:

Commercial aviation MRO demand is driven by the level of aviation activity and airline profitability.

A decline in either would have a negative impact on volumes due to lower flight activity, deference of maintenance activity and possible grounding of older planes which are more maintenance intensive.

This was observed in FY2009. Lower economic growth, terrorist activity, natural disasters, wars and epidemic outbreaks (e.g. H7N9) are some of the factors that could reduce aviation activity.

Airline profitability could be affected by flight activity, cost pressures (e.g. jet fuel prices) and competition.

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