DBS Vickers 2015-08-06: ST Engineering - 2Q15 results. M&A Could Fast Track Growth. Maintain BUY.

M&A Could Fast Track Growth


Outlook remains healthy. 

  • ST Engineering’s orderbook of S$12.2bn as of end-1Q15 provides good visibility on revenues and underpins our steady c.6% growth in earnings over FY15/16. 
  • Order wins by Aerospace and Electronics divisions in 2Q15 have been encouraging. 
  • A combination of low oil prices and positive outlook for US and Asian airlines – ST Aerospace’s key customers – bodes well for MRO revenues and margins in the near to medium term. 

Targeted investments provide potential upside in medium term. 

  • The aerospace business’s investments into cabin interiors and VIP completions and configurations business in the US, as well as new partnerships with OEMs across the value chain, create new avenues for growth amidst a broadly stable industry environment. 

M&A potential remains untapped. 

  • ST Engineering sits on a very healthy balance sheet with more than S$500m cash hoard. 
  • We believe it should make use of its balance sheet more efficiently to target ROE and EPS-accretive acquisitions. 
  • Among other ideas, an attempt to boost its leadership position in the airframe MRO market by merging with compatriot SIA Engineering should be beneficial to both, and yield important synergies. 


Valuation: 


  • Maintain BUY with a target price of S$3.80, based on a blended valuation framework (blend of price-earnings, dividend yield and discounted cash flows) to factor in both earnings growth and cash-generative nature of the business. 



Share Price Drivers: 


Strong order wins. 

  • While order wins were sluggish for most of 1H15, recent announcements of ST Aerospace securing S$920m and ST Engineering securing S$424m worth of contracts in 2Q15 are encouraging. 
  • More announced wins to that tune should boost the share price. 

Recovery in the Marine sector. 

  • The Marine sector is arguably facing the strongest industry headwinds on the commercial front, with low offshore oil & gas spending and broad overcapacity in shipping. 
  • Cost overruns in the US exacerbate the situation. An industry recovery, as well as better productivity in the US, would provide more confidence in the medium-term earnings of the business.


Key Risks to Our View: 


  • The structural changes facing the aircraft MRO industry could hit harder than expected, as newer airframe and engines reduce maintenance spend and lengthen the cycle for checks and OEMs take a larger share of the aftermarket services. 
  • Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.


Analyst: Suvro SARKAR

Source: http://www.dbsvickers.com/


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