ST Engineering - CIMB Research 2018-03-22: Setting 2022 Targets

SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Setting 2022 Targets

ST Engineering (STE) hosted its inaugural Investor Day in Singapore with c.70 participants from both buy and sell side.
Targets smart city revenue to at least double from S$1bn by 2022.
Marine revenue to recover to 2013/14 level by 2022 (or double from FY17’s S$638m).
Dividend payout (90%) and ROE (c.24%) will be sustained. Maintain ADD and Target Price of S$3.80 on blended DCF, P/E and dividend yield.

STE guides that its smart city related revenue (mainly led by electronics division) will at least double from S$1bn (as at end-FY17), from new and existing orders.
Currently slightly less than 50% of its smart city revenue are from Singapore. UK and Canada are the biggest export markets for its smart cities solutions including smart metre and smart street lights. The above target includes cyber/physical security and smart mobility solutions (rail, autonomous public transport solutions and intelligent road transport solutions)
We think the target is achievable given the sustained contracts won (c.S$2bn p.a.) by its electronics division, boosted by advanced electronics and ICT solutions orders since 2014. Note that the division clinched c.S$1bn p.a. orders over 2006-2013.
The growing awareness of smart city solutions and cyber security could scale up this unit's annual win to c.S$3bn p.a. in the next 3 years, in our view.

Marine revenue is set to recover to 2013/14's level of S$1.2bn-1.3bn by 2022, double FY17’s revenue of S$638m.
We think the revenue recognition of the engineering, procurement and construction (EPFC) portion of the desalination plant contract in marine’s engineering segment would partially help to achieve the target. More importantly, this division needs to accelerate shipbuilding order wins by 2019F to achieve the target.
In Nov, its US subsidiary VT Halter Marine secured a contract from Quality Liquefied Natural Gas Transport LLC for a LNG-powered articulated tug barge (ATB). We estimate this contract to be worth c.US$40m and could lead to more orders for larger LNG vessels.
Key risk for marine is execution and cost overrun.

STE estimate its addressable market for defence export to be worth S$7bn globally (US:S$2.5bn, Europe & MENA: S$2bn, Latin America: S$1.5bn, rest of world: S$1bn). The largest near-term contract STE is gunning for is the final award of amphibious combat vehicle (AVC; partnering US SAIC) for the US Marine Corp. This could be worth more than US$1.3bn, to be awarded in Jun/Jul.
The next catalyst could come from the award of the prototype for Mobile Protected Firepower for the US Army, to be announced by 2H18.

Aerospace will grow its passenger-to-freighter (P2F) conversion revenue to a steady state of more than S$400m. We estimate current P2F revenue at about S$200m300m.
The unit also plans to grow its aircraft leasing business from 5 aircraft to 50.

Other targets for 2022:
1. revenue CAGR of core and other businesses to grow 2-3x global GDP growth (ex M&As), and
2. two-thirds of revenue growth from global markets.
We think growth is likely to be back-loaded to 2021/22. Assuming global GDP growth of 3% p.a., base case ex-smart city growth could be c.6%. Group revenue growth will be at 7-11% (if smart city revenue more than doubles to S$3bn in 2022).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-22

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