ST Engineering Ltd - RHB Invest 2017-12-19: Growth To Return In 2018

ST Engineering Ltd - RHB Invest 2017-12-19: Growth To Return In 2018 SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering Ltd - Growth To Return In 2018

  • ST Engineering (STE)’s exposure to commercial and defence industries across four segments creates a defensive business model that is tough to beat. 
  • We believe rising demand for P2F conversions and spending on Smart Nation initiatives should support the aerospace and electronics growth in near term. ST Engineering’s investment in robotics would lay the foundation for sustained growth for land systems in the long term. 
  • While a 4.5% dividend yield could support the stock, strong order wins and accretive M&As may act as share price catalysts. 
  • Maintain BUY with a SGD4.04 TP (26% upside). 

Positive on passenger-to-freighter (P2F) conversion business. 

  • ST Engineering (STE) strongly believes in the growth potential of P2F conversion business. The group would deliver its first A330 P2F to DHL by end-2017 while delivery of its first A320 P2F to Egypt Air remains on track. It 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.

Robotics - foundations for long term growth. 

  • ST Engineering (STE) announced an investment in Aethon Inc (Aethon), a provider of indoor autonomous mobile robots (AMR). The company 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. 

  • Despite continuing weakness in its marine business, ST Engineering is investing in the ship repair business, in line with expectations of growth in this segment. It acquired marine repair assets in the US for USD25m during 3Q17. 
  • 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. VT Halter Marine Inc’s ongoing arbitration with Hornbeck Offshore Services LLC still offers a risk of further impairments.

Continue to like STE for its improving earnings outlook. 

  • The company’s existing orderbook of SGD13.5bn provides revenue visibility for two years. While ST Engineering's share price has been under pressure, we continue to like its defensive business model, which offers growth prospects from P2F conversions and proxy to Smart Nation initiatives.

Premium valuation for quality. 

  • Our SGD4.04 TP is based on the average of P/E-, P/BV-, EV/EBITDA- and DCF-based valuations and implies 23x 2018F P/E, ie slightly above 1SD forward P/E. 
  • We believe the premium valuation is justified, given prospects of earnings recovery and steady dividend yields.
  • Key risks include weakness in marine business, delays in order inflow and litigation costs.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 4.040 Same 4.040