ST Engineering - Maybank Kim Eng 2018-11-14: Ticking Along To Plan


ST Engineering - Ticking Along To Plan

3Q18 profits a small miss due to Marine

  • 3Q18 was a good quarter on most fronts with the exception of Marine, which performed worse-than-expected that led to group profit missing our expectation by c5%.
  • Despite a somewhat turbulent macro backdrop, management is positive about secular growth in robotics, Smart City solutions and aerospace manufacturing where ST Engineering has made investments in the past 18-24 months.
  • Our forecasts and DCF Target Price are unchanged (8.1% WACC, 2% LTG). Maintain BUY.

Three units firing; fourth improving, albeit slowly

  • ST Engineering's core PATMI was up 3%/13% y-o-y in 3Q18/9M18, largely driven by revenue growth in Aerospace & Electronics and margin/mix improvements in Electronics & Land Systems.
  • 3Q18 pretax profits for Aerospace/Electronics/Land Systems grew a solid 11%/20%/20% y-o-y but Marine’s fell 29% caused by persistently challenging conditions in shipbuilding and ship repair. That said, the 9M18 period for Marine comprised of three sequential quarters of improving pretax profits, just that it is slower than expected.

Order wins strong across the board

  • Aerospace/Electronics/Marine clinched new contracts of SGD590/435/431m, making it a fairly strong quarter for new wins. Land Systems secured a number of new contracts too in public-transport work related to Euro-6 diesel buses, electric vehicles and autonomous vehicles.
  • Outstanding order book as at end-3Q18 was SGD13.3b, close to its all-time high.

Continuing to invest in new growth drivers

  • The most notable event during the quarter was its acquisition of MRA Systems in the US, providing it a foothold in complex aircraft component manufacturing. See report: ST Engineering: A big LEAP dated 14 Sep 2018..
  • Other major investments announced over the past year were a proposed new aerospace facility in Pensacola, US with 2.1m man hours of capacity and a second aircraft floor panel-manufacturing plant in Germany ahead of an expected ramp-up of aircraft deliveries from customer, Airbus.

3Q18 results and highlights

  • Results were slightly below our expectation, with 9M18 revenue and core PATMI accounting for 70% and 71% of our FY18E forecasts (which are 4% ahead of Factset consensus). The key reason for the miss was a worse-than-expected Marine performance.
  • ST Engineering's 3Q19 group revenue was flat y-o-y, -2% q-o-q; EBITDA +4% y-o-y, +3% q-o-q and underlying core PATMI +3% y-o-y, -5% q-o-q. 9M19 revenue was flat y-o-y, EBITDA +7% y-o-y and core PATMI +13% y-o-y.
  • Three of its four businesses delivered growth.
    • Aerospace revenue was up 13% y-o-y and pretax, 11%, largely from higher work volumes across its units.
    • Electronics revenue was flattish but pretax grew 20% from lower operating expenses, partially from scale efficiencies.
    • Land Systems revenue was down 10% but pretax was up 20% from higher gross margins afforded by a better sales mix.
    • Marine revenue was down 16% and pretax, down 29%, from lower-than-expected revenue recognition and an unfavourable sales mix.
  • Order book was relatively unchanged y-o-y and q-o-q at SGD13.3b. Management expects cSGD1.6b of this to be delivered in 4Q18.

Thesis, forecasts & valuation

Investment thesis

  • After three lacklustre years caused by tough market conditions for three of its four operating divisions (Aerospace, Land Systems, Marine) as well as one-off restructuring costs at Land Systems/Marine, the outlook for ST Engineering in 2018-2020 is much brighter, with a cyclical recovery in Aerospace and growth catalysts from new investments in Electronics and Land Systems in place.

Forecasts & valuation

  • We forecast a core profit CAGR of 14% for FY17-20E on the back of a revenue CAGR of 13%.
  • We expect a resumption of growth from five key factors:
    1. the Aerospace industry has been improving since mid-2017, triggered by a rebound in global air cargo volumes and better-than-expected passenger traffic growth,
    2. Electronics solutions could yield upside surprises with governments increasing investments in smart city infrastructure such as smart street lighting, water management, metering, transport management systems and cyber-security, etc.,
    3. problem areas in Land Systems have been ironed out and growth could stem from new investments in electric vehicles, autonomous vehicles and robotics,
    4. write-downs in Marine have been largely done. While Marine’s operating environment is still challenging, y-o-y profit declines are expected to stabilise and,
    5. contributions from acquisitions of the last 18-24 months. Notably, SP Tel, Aethon and MRAS are important additions to its capabilities for tapping high growth in enterprise ICT, cyber security solutions, the autonomous robot market and entry into OEM aircraft component manufacturing.
  • Our DCF Target Price remains SGD4.35 (8.1% WACC, 2% LTG).


  • The top-two risks to our forecasts are a material downturn in Aerospace and further write-offs at Marine.
  • Other risks include a global macro downturn that could force governments to cut back their investments in urban transport and smart city infrastructure, cost pressures from rising commodity prices and import tariff regimes in its operating markets.

Neel Sinha Maybank Kim Eng Research | 2018-11-14
SGX Stock Analyst Report BUY MAINTAIN BUY 4.350 SAME 4.350