Aviation – Singapore - UOB Kay Hian 2018-09-10: New Competitor For STE; SATS Is Now Our Top Pick In The Sector

Aviation – Singapore - UOB Kay Hian Research 2018-09-10: New Competitor For Ste; SATS Is Now Our Top Pick In The Sector SINGAPORE TECH ENGINEERING LTD SGX:S63 SATS LTD. SGX:S58 SIA ENGINEERING CO LTD SGX:S59 SINGAPORE AIRLINES LTD SGX:C6L

Aviation – Singapore - New Competitor For ST Engineering; SATS Is Now Our Top Pick In The Sector

  • The introduction of a new player in the cybersecurity solutions arena, one helmed by a former key executive, could impact ST Engineering’s plans to double Smart City-related revenue over a five-year period. We thus lower our fair value for ST Engineering from S$4.10 to S$3.80.
  • Our top pick within the sector is now SATS and we expect increasing ship calls at MBCC and new routes launched by JAL to boost earnings in the coming quarters.
  • Maintain MARKET WEIGHT.


Increased competition for ST Engineering (STE) as Starhub teams up with Temasek to form a cybersecurity arm - Ensign InfoSecurity (EIS).

  • Ensign InfoSecurity (EIS) is a JV between Temasek-owned Certis’ cyber security arm, Quann, and Starhub’s Accel System and Technology. Ensign InfoSecurity, billed as one of Asia’s largest pure play cyber security firms, will be helmed by Mr Lee Fook Sun, who from 2009 to 2016 was the President of ST Electronics. Under his watch, the electronics division’s PBT grew by 80%. Mr Lee also served as Deputy CEO of ST Engineering.
  • With Mr Lee now at the helm, and with Singtel emerging as a key player in the area, competition for the S$1.0b (according to Statistsa, projected spending is expected to rise from current S$0.7b to S$1.0b) cybersecurity spending pie has grown sharper.

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Improving ship calls at Marina Bay Cruise Centre (MBCC) should boost SATS’ profitability in coming quarters.

  • As at 2Q18, inbound tourist arrivals by sea rose 24% y-o-y vs 1Q18’s 11.4%. 3Q’s growth is seasonally stronger, and thus growth could exceed 2Q’s. If so, SATS’ gateway services revenue and profitability is likely to rise.
  • Much of the growth in tourist arrivals in 2Q18 was underpinned by Chinese arrivals, with a 248% y-o-y increase. Indonesia still remains the largest source market, accounting for almost half of arrivals and rising by 11% ytd.

Notwithstanding the temporary closure of the Kansai airport, SATS’ Japanese catering arm TFK should also benefit from higher capacity addition by key customer Japan Airlines (JAL).

  • JAL has added several international flights since May, all on wide- bodied aircraft. This should lead to higher meal volume and profitability at 51% owned TFK. As at 1QFY19, TFK’s revenue grew 3.1%, and SATS is optimistic of future growth, citing rising Chinese visitor arrivals and JAL’s international capacity expansion. 
  • As for the temporary closure of Kansai airport, we do not expect any significant impact to TFK as the latter primarily operates out of Narita and Haneda airports.


ST Engineering had targeted revenue to grow 2-3x faster than global GDP growth over the next five years, but that could be at risk.

  • Implicitly, ST Engineering’s five-year plan was to grow revenue by between 8-10% CAGR, with the electronics division as a key growth pillar. Within that division, ST Engineering had guided that Smart City revenue, which as at end-17 amounted to S$1b, was expected to grow to S$2.1b over a five-year period, implying a 16% revenue CAGR. 
  • Smart City revenue is made up of:
    1. Smart security, which involves cyber security and public security;
    2. Smart environment, which involves automated sensors, smart lighting, congestion management, waste sensors etc; and
    3. Smart mobility, which involves the use of autonomous vehicles for public transport and smart robotics.

We lower our fair value for STE by 7.4% to S$3.80.

  • Factoring in a more competitive landscape, we lower our revenue growth assumption for ST Engineering for 2019-20 from 6.6% to 5.2%, after lowering our estimated revenue growth for the electronics division. Consequently, we lower out 2019/20 net profit estimates by 2.5% and 3.8% respectively.
  • We continue to value ST Engineering on an EV/invested capital basis, but lower our long-term ROIC estimate by 0.1ppt to 14.4% and terminal growth rate to 2.6% vs 2.9% previously.

Maintain BUY on SATS with an unchanged target price of S$6.10.

  • Given the strong correlation between ship calls handled and travellers by sea, we expect an even stronger revenue and earnings growth from the cruise handling business for 2QFY19. 
  • We have estimated a conservative 8.7% revenue growth for gateway services for the full year (1QFY19: +10% y-o-y). Based on that, we expect SATS to achieve 6.4% core net profit growth for the full year.

No immediate catalyst for SIA; 2QFY18 earnings could be impacted by travel disruptions to Japan.

  • Floods at Osaka and earthquake at Hokkaido could impact SIA’s load factors to the region and possibly for the quarter as well.
  • Lower fuel prices would be the primary stock price catalyst for SIA, despite the stock trading near a three-year low.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-09-10
SGX Stock Analyst Report BUY Maintain BUY 3.80 Down 4.100
BUY Maintain BUY 6.100 Same 6.100
HOLD Maintain HOLD 3.400 Same 3.400
HOLD Maintain HOLD 11.100 Same 11.100