ST Engineering - RHB Invest 2018-05-14: Maintaining Growth Expectations

SINGAPORE TECH ENGINEERING LTD SGX: S63

ST Engineering - Maintaining Growth Expectations

ST Engineering (STE) reported 1Q18 net profit of SGD118m (+18% y-o-y) vs our estimate of SGD129m. This lower-than-expected performance was due to higher-than-expected operating costs and lower-than-estimated performance at the land systems operations.
The continued push to secure more P2F conversion orders, smart city related contracts in and outside of Singapore, higher defence exports, and increase in MRO capacity should drive STE’s earnings growth in the near term.
Maintain BUY with unchanged SGD4.04 Target Price, offering 19% upside.

Growth in 1Q18 revenue to SGD600m (+8% y-o-y) was aided by a 24% y-o-y growth in the component engine repair & overhaul (CERO) business. CERO was also the only business within the aerospace segment to report an increase in net profit.
During 1Q18, the aerospace segment won SGD510m worth of new orders, which included a 5-year maintenance contract from Lufthansa Cargo, an interior reconfiguration contract for Air Canda’s B787s, and heavy maintenance contracts for B757s and B767s operated by an US airline.
ST Engineering is looking to secure launch customers for A320 passenger-to-freighter (P2F) conversion, grow its aircraft leasing fleet, and increase MRO capacity at its Pensacola facility in the US during 1H18.

The electronics business was the largest contributor to revenue and profit growth during 1Q18, with revenue of SGD609m, (+21% y-o-y) and profit of SGD40m (+23% y-o-y).
All business segments under the electronics segment delivered revenue growth in 1Q18. While the PBT margin for electronics declined q-o-q to 8%, STE expects the margin to improve to 10% as the year progresses.
During the quarter, the electronics segment won SGD635m worth of new contracts, which included the deployment of smart sensor networks for automatic water reading and smart street lighting solutions for cities in New Zealand, the UK, Canada, Israel and the US, and rail electronic projects in Taiwan, Thailand and China.

The land systems operations reported a 3% y-o-y growth in revenue to SGD286m, and 34% y-o-y growth in profit to SGD16m. It performed below our expectations as the munitions and weapons business reported a loss vs our estimate of a q-o-q increase in profit, due to the shifting of some project delivery to 2Q18/3Q18 from 1Q18, and assured that business should improve as the year progresses.
The marine business continues to be impacted by a weak business environment, with losses at the shipbuilding business offset by strong growth in ship repair and engineering profits.

ST Engineering (STE) remains on track to deliver strong growth in 2018, amidst a greater push for defence exports, higher P2F conversions, and The pursuit of smart city-related contracts in and outside of Singapore.

ST Engineering (STE)’s strong orderbook of SGD13.4bn provides revenue visibility for two years. It has highlighted that c.SGD3.2bn of the orderbook is expected to be delivered in 2018. We believe this will support the recovery in earnings growth and drive a re-rating for the stock.
Key risks include weakness in the marine business, delays in order inflow, and litigation costs.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-14

SGX Stock Analyst Report BUY Maintain BUY 4.040 Same 4.040