ST Engineering - RHB Invest 2018-09-06: Continues Winning Contracts; Among Our Top Picks

ST Engineering - RHB Securities Research 2018-09-06: Continues Winning Contracts; Among Our Top Picks SINGAPORE TECH ENGINEERING LTD SGX:S63

ST Engineering - Continues Winning Contracts; Among Our Top Picks

  • Reiterate BUY with SGD3.97 Target Price, 22% upside.
  • ST Engineering should see a gradual revival in earnings growth, aided by an increased MRO activity, P2F conversions, delivery of smart city-related contracts in and outside Singapore and defence-related contracts. Its peak level of SGD13.4bn orderbook offers a 2-year revenue visibility and more than 4% yield should provide support to the share price.
  • We believe the continuation of order wins, similar to the recently announced aerospace contract with Jet Airways, which could be a key catalyst.
  • ST Engineering is one of our Singapore 2H18 Top Stock Picks.

New aerospace contract win.

~ ~ Where SG investors share
  • Last week ST Engineering signed an agreement to provide engine MRO services for the Boeing 737NGs belonging to Jet Airways. This agreement was an add-on to an earlier contract announced in 2015, which covered only a portion of the airlines’ 737NG fleet. Under the latest agreement, Jet Airways’ entire fleet of 80 737NGs will be covered, doubling the contract value to USD700m.
  • As part of the contract, ST Engineering will provide an integrated suite of engine MRO solutions, including off-wing engine heavy maintenance checks, on-wing services as well as technical support. These services will be provided over a period of six years beginning in 2019.

Order win is positive for the component engine repair & overhaul (CERO)

  • Order win is positive for the component engine repair & overhaul (CERO) division of aerospace, which has seen high utilisation rates and an uptick in shop visits since late 2017 and 2018. CERO’s contribution to aerospace PBT has increased to 30% in 2Q18 (2015: 15%). It has also seen its PBT margin expand to 11.3% in 2Q18 (1Q17: 6.3%).
  • We believe the Jet Airways contract will assist the aerospace business to maintain the profitability that it is currently witnessing at its CERO division.

Electronics bagged a small contract as well.

  • ST Engineering, along with Siemens, won a SGD18.8m contract from Singapore’s Land Transport Authority to develop and implement a Rail Enterprise Asset Management System (REAMS) for Singapore’s MRT network. The implementation of REAMS will start with the Downtown Line (DTL) and other rail lines will be added in phases thereafter. STE and Siemens will develop a software platform that will house and analyse data from DTL’s maintenance management system, its fleet of 92 trains and other key systems that are critical to DTL’s efficient operation. The core functions of REAMS are expected to be operational by mid-2020.
  • We believe the ordersize could get scaled up once more MRT lines are added to REAMS.

Stock has strong defensive attributes.

  • The aerospace contract win brings STE’s 2018 order wins to SGD3bn, SGD2bn short of 2017 record order wins. Its outstanding SGD13.4bn orderbook offers a 2-year revenue visibility. 
  • ST Engineering has outperformed the STI Index by 7.3% YTD and offers a dividend yield of 4.6%, which is higher than 4% yield for the STI Index.
  • The company has a strong balance sheet and offers an ROE of more than 20%. The stock is trading at 16x 2019F P/E, below 5-year average forward P/E of 19x.

Shekhar Jaiswal RHB Securities Research | 2018-09-06
SGX Stock Analyst Report BUY Maintain BUY 3.970 Same 3.970