ST Engineering - CIMB Research 2018-01-17: S$2.8bn Aerospace Contracts In 2017

ST Engineering - CIMB Research 2018-01-17: S$2.8bn Aerospace Contracts In 2017 SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - S$2.8bn Aerospace Contracts In 2017

  • ST Engineering’s aerospace division clinched S$510m of MRO contracts in 4Q17, bringing 2017 contract wins to S$2.8bn (+8% y-o-y). At group level, it has secured a record S$6.3bn.
  • We think the stock is cheap at 16x CY19F P/E, below its 5-year average of 20x 12M rolling forward P/E. It has also lagged its peers in capital goods YTD.
  • Maintain ADD and target price of S$3.85, based on blended valuations.

S$510m of commercial and defence aerospace contracts

  • ST Engineering’s aerospace division clinched S$510m of contracts in 4Q17, comprising airframe maintenance, landing gear repairs and pilot training. This brought 2017 total contract wins to S$2.8bn (2016: S$2.6bn, 2015: S$2bn) .
  • The airframe maintenance contracts included multi-year jobs to provide A and C checks for B777 and B747 planes, as well as support for MD-11 and A320 planes.
  • Other maintenance, repair & overhaul (MRO) jobs include agreements for ATR72-500 shipsets, and landing gear repair for military planes.

Redelivery of A330-300 PTF

  • ST Engineering's European JV with Airbus, Elbe Flugzeugwerke GmbH (EFW), redelivered its first A330-300 passenger-to-freighter (PTF) converted aircraft to DHL in 4Q17. EFW will convert for DHL four A330-300 aircraft to a 26-pallet cargo configuration, capable of carrying up to 61 metric tonnes of payload.
  • With the delivery, we expect prototype costs to gradually decrease. 
  • Recall that PBT for ST Engineering's engineering & material services segment (which included PTF costs incurred in EFW) in 3Q17 dropped 39% q-o-q to S$22m due to A330 PTF prototype costs.

Annual win at record S$6.3bn, before electronics’ 4Q17 orders

  • Excluding 4Q17 electronics contract wins, ST Engineering has clinched S$6.3bn of orders in 2017, a record level. We expect strong 4Q performance from the electronics division as well (4Q17 contract wins have yet to be announcement). As of 9M17, the division has secured S$1.5bn worth of contracts, comprising S$1bn of advanced electronics/ infocomm projects. 
  • We are hopeful of more contracts for security and traffic management from both the commercial sector and governmental agencies. We estimate the division could end the year with c.S$2bn of contracts (2016: S$2.3bn, 2015: S$1.6bn).
  • With the rising oil prices, ST Engineering's marine division could see stronger ship repair/ conversion jobs returning. Recall that in 3Q17, the division surprised on the upside from such jobs. The only overhang we see is the potential for provision for arbitration with Hornbeck (US$43.5m of revised damages claim vs. ST Engineering’s counterclaims of US$3.3m).

Laggard among capital goods peers

  • We think the stock is cheap at 16x CY19F P/E, below its 5-year average of 20x 12M forward P/E. It underperformed its peers such as Keppel Corp and Sembcorp Marine in the capital goods sector YTD mainly because of its lacklustre quarterly earnings and recurring provisions for marine. It has also underperformed its airport service peer SATS (trading at 24x CY19F P/E).
  • ST Engineering's FY17-18F dividend yield is decent at 4.5-4.7%, sustained by its net cash position (S$37m including investments as of 9M17).
  • Our target price of S$3.85 is based on blended valuations (22x CY19 P/E, DCF and dividend yield).

LIM Siew Khee CIMB Research | 2018-01-17
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.850 Same 3.850