ST Engineering - OCBC Investment 2018-02-07: Healthy Order Book To Support Earnings Ahead

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Healthy Order Book To Support Earnings Ahead

• ST Aerospace secured S$510m orders in 4Q17.
• ST Electronics secured S$742m orders in 4Q17.
• Positive on long-term outlook.

Aerospace arm records S$2.8b in total contract wins for FY17 

• Singapore Technologies Engineering (STE) announced in Jan 18 that its aerospace arm (ST Aerospace) secured new contracts worth ~S$510m in 4Q17, which include multi-year maintenance contracts to provide A- and C- checks for Boeing aircraft (e.g. B777, B747 etc.), as well as support for other platforms (e.g. MD-11, A320 etc.). 
• Notably, EFW, which is the JV between ST Aerospace and Airbus, redelivered its first A330-300 passenger-to-freighter (PTF) converted aircraft to DHL in 4Q17. 
• Recall that ST Aerospace in FY16 signed an agreement to convert four A330-300 passenger aircraft to freighter for DHL. We have also previously highlighted there will be costs associated with the learning curve leading up to the conversion of the first aircraft for DHL. 
• In our view, with the first aircraft delivered on time, such costs will likely decline progressively for the next few conversions and future conversions for other customers.

S$2.2b of new orders clinched by electronics arm in FY17 

• In addition, ST Engineering also announced in Jan 18 that its electronics arm (ST Electronics) clinched ~S$742m in new contracts in 4Q17 for Rail Electronics & Intelligent Transportation, Satellite & Broadband Communications, as well as Advanced Electronics and ICT solutions. 
• Close to S$500m worth of new contracts in 4Q17 were Advanced Electronics and ICT contracts from local and overseas customers, and include projects relating to smart cities management in China, Europe, India and the US, as well as communications system for hospitals in Hong Kong.

Rolling-forward our valuations 

• Over the longer-term, we remain positive on:
  1. ST Engineering’s electronics sector exposure to high growth areas relating to smart nation initiatives (ICT-related business) and digital business,
  2. aerospace arm gaining traction on PTF projects, as well as
  3. improved outlook for marine sector, assuming oil prices can stay at higher levels compared to 1H17. 
• All considered, as we adjust upwards our forecasts and roll-forward our valuations, our Fair Value increases from S$3.61 to S$4.00. Based on 6 Feb 18 closing price of S$3.23, we believe STE’s valuations are attractive and supported by FY18F dividend yield of 4.7%.
• (Upgrade to BUY)

Eugene Chua OCBC Investment | http://www.iocbc.com/ 2018-02-07

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