ST Engineering - RHB Invest 2018-08-10: Steady Growth With Reasonable Yield

ST Engineering - RHB Securities Research 2018-08-10: Steady Growth With Reasonable Yield SINGAPORE TECH ENGINEERING LTD SGX:S63

ST Engineering - Steady Growth With Reasonable Yield

  • Maintain BUY with a new SGD3.97 Target Price from SGD4.04, 15% upside, amidst a 5% cut in 2018 profit.
  • ST Engineering’s 1H18 profit of SGD235m (+14% y-o-y) was a tad below expectations amidst lower-than-estimated profit for Land Systems. Aerospace and Electronics, which remain key earnings drivers, delivered strong profit growth in 2Q18.
  • We maintain that P2F conversions, increase in MRO capacity, smart city-related contracts in and outside Singapore, and higher defence exports should drive near-term profit growth.
  • Strong orderbook with 2-year revenue visibility and +4% yield support our positive view on this stock. ST Engineering is one of our Singapore 2H18 Top Picks.




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Aerospace.

  • 26% y-o-y profit growth in 2Q18 was aided by higher shop visits witnessed by the engine repair & overhaul business, sale of two engines, and SGD9m gain from an associate sale. Aerospace reported SGD510m in new order wins in 2Q18 (2Q17: SGD650, 1Q18: SGD510m). A330 passenger-to- freighter (P2F) deliveries are set to drive near-term growth.
  • ST Engineering has a firm contract to deliver eight A330 P2F aircraft to DHL. ST Engineering has already delivered two aircraft, while a third conversion is in progress. To support long- term growth, it is looking to secure launch customers for an A320 P2F project and grow its aircraft leasing fleet. 
  • ST Engineering has also embarked on capacity expansion – setting up second composite panel manufacturing plant in Germany that should lift production by 50%.


Electronics.

  • 22% y-o-y profit growth in 2Q18 was aided by higher profit margins across all business segments. 
  • Electronics reported SGD764m in new order wins in 2Q18 (2Q17: SGD490, 1Q18: SGD635m), including: rail electronics solutions (Taipei, Wuhan, and Singapore), Internet of Things-enabled smart street lights pilot (Hong Kong), integrated public safety & security, and cyber security solutions for commercial and defence customers, as well as contracts to supply satellite communication products and Cloud solutions.
  • Near-term growth should depend on delivery of smart mobility, satellite communications, and software systems-related contracts, which as per ST Engineering, are all on schedule.


Land Systems & Marine.

  • In 2Q18, land systems secured new contracts: weapons & munitions supplies from customers in Asia-Pacific and Europe, and road construction equipment and specialty vehicles from clients in North & Latin America and Asia.
  • ST Engineering also commenced on-road testing of on-demand autonomous shuttles in Singapore. While Marine witnessed a 9% y-o-y drop in revenue to SGD148m, the business witnessed a 7% q-o-q improvement in profit to SGD9m (2Q17: SGD1.4m loss).
  • We expect Marine to sustain this improvement in earnings as it delivers a sixth Littoral Mission Vessel to the Singapore Navy and LNG-powered container RO-RO vessels in 2H18. It will also start construction of the Jurong Island Desalination Plant during this period.


Maintain BUY.

  • ST Engineering announced an interim dividend of SGD0.05 (unchanged from 2017) and should pay SGD0.15 in dividends for 2018, implying 4.3% yield.
  • Its strong SGD13.4bn orderbook provides revenue visibility for two years. It has highlighted that c.SGD2.7bn of the orderbook is expected to be delivered in 2H18. We believe this, along with continuing order wins, will support earnings growth and drive a re-rating for the stock.





Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-10
SGX Stock Analyst Report BUY Maintain BUY 3.97 Down 4.040



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