ST Engineering Ltd - RHB Invest 2017-11-09: Fundamentally Defensive Business

ST Engineering Ltd - RHB Invest 2017-11-09: Fundamentally Defensive Business SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering Ltd - Fundamentally Defensive Business

  • ST Engineering (STE) reported 3Q17 PBT of SGD163m (+53% YoY) vs our estimate of SGD167m. 
  • Growth was aided by the Aerospace and Electronics, while Marine business remained weak. 
  • YTD order win of SGD3.8bn accounts for 70% of our 2017 order win estimate. Rising demand for P2F conversions and spending on Smart Nation initiatives should support the Aerospace and Electronics growth in near term. 
  • STE’s investment in robotics would lay the foundation for sustained growth for Land Systems in long term. 
  • Maintain BUY with a revised SGD4.04 TP (from SGD4.07, 18% upside).

Positive on long term outlook of passenger-to-freighter (P2F) conversions. 

  • Aerospace won SGD530m of contracts in 3Q with future order wins expected to range between SGD350m-550m. ST Engineering (STE) strongly believes in the growth potential of P2F conversion business. It would deliver its first A330 P2F to DHL by year end and delivery of its first A320 P2F to Egypt Air remains on track. 
  • STE believes business margins would improve once the P2F business gets into a ‘serial production’ mode. It added two aircrafts to its aircraft leasing business during 3Q and is looking to grow its mid-life to end-of-life aircraft leasing business rapidly.

Rising competition in Electronics. 

  • Electronics won SGD585m of contracts in 3Q. While growth opportunities exist in transportation and satellite businesses, STE acknowledged that competition has been intense. 
  • ST Engineering aims to lower its operating costs and build long term partnerships with larger players in the industry in order to remain competitive. STE acknowledged and we maintain that investments in Smart Nation initiatives would support growth for Electronics in the long term.

Robotics - foundations for future growth. 

  • We are excited about STE’s investment in Aethon, a provider of indoor autonomous mobile robots (AMR). 
  • ST Engineering believes Aethon could make a material contribution to its revenue in the next 3-4 years. AMR’s global market would be worth c.SGD1bn in 2022. Assuming a 10% market share, Aethon could contribute USD100m revenue (c.2% of our revenue estimate) in 2022. At present, Aethon has a 30% market share in AMR.

Marine business remains weak. 

  • While Marine witnessed a decline in revenue and profits across all business groups, STE continues to invest in the ship repair business in-line with expectations of growth in this segment. 
  • ST Engineering acquired marine repair assets in the USA for USD25m during 3Q. The group has also remained focussed on rationalising costs and has lowered its segment staff costs by 9% YTD. 
  • We believe defence jobs would support shipbuilding revenue in near term. Halter Marine’s arbitration with Hornbeck is still ongoing. 

Continue to like STE for its improving earnings outlook. 

  • ST Engineering’s existing order book of SGD13.5bn provides revenue visibility for two years. We lower 2017 EPS by 4% to reflect weakness in Marine business and adjust TP to SGD4.04 (from SGD4.07). 
  • While ST Engineering share price has been under pressure lately, we continue to like STE’s defensive business model, which offers growth prospects from P2F conversions and proxy to Smart Nation initiatives. 
  • Key risks include weakness in marine business, delays in order inflow and litigation costs.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-09
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 4.04 Down 4.070