ST Engineering - RHB Invest 2018-12-14: Buy Into Earnings Recovery And Stable Dividends


ST Engineering - Buy Into Earnings Recovery And Stable Dividends

  • Maintain BUY, with SGD3.97 Target Price, offering 15.4% upside.
  • ST Engineering should see a revival of profit growth aided by increased capacity and capabilities in Aerospace, delivery of smart city-related contracts in and outside Singapore and defence-related contracts. Its SGD13.3bn orderbook offers 2-year revenue visibility and its more than 4.5% yield should provide support to the share price.
  • In addition to continuing order wins for its Aerospace and Electronics businesses, the recent revival in Marine order wins and completion of MRAS acquisition in 1Q19, could be key re-rating catalysts.

Building Aerospace capabilities is the key to growth.

  • ST Engineering (STE), the world’s largest airframe MRO service provider, aims to complete construction of its new airframe MRO capacity in Pensacola (US) by 2022. This new capacity will have four hangars and will increase STE’s MRO capacity by 2.1m man-hours.
  • On the passenger to freighter (P2F) conversions, STE delivered the first A330 P2F aircraft to Egypt Air in August and is in the process of converting the second one for delivery in 2Q19. The A330 P2F deliveries to DHL are also on track. To support long-term growth, it is looking to secure launch customers for an A320 P2F project and grow its aircraft leasing fleet.

Completion of MRAS acquisition should support re-rating.

  • ST Engineering remains confident of completing the acquisition of Middle River Aircraft Systems (MRAS) by 1Q19. The acquisition would be fully funded by debt, which will be USD-denominated and undertaken by one of STE’s US-based entities.
  • Based on our revised back-of-envelope estimates, the MRAS acquisition, which is yet to be included in our estimates, could lift our 2019F-2020F earnings by 4-5%. We remain positive that completion of the deal may be a key catalyst for the stock.

Recovery in earnings growth is on track.

  • We expect ST Engineering to deliver c.15% earnings growth in 2019 (consensus: c.14.7%). While much of the growth is expected to be delivered by the Aerospace and Electronics businesses, we believe that improvement in Marine profitability will also be a factor driving growth. This was evident in 3Q18 results. In 3Q18, all segments except Marine reported strong profit growth.
  • Even though the Marine business reported profit decline in 3Q18, 9M18 profit grew 16% y-o-y amidst a q-o-q improvement in the business.

Strong orderbook with potential order win upside from marine.

  • ST Engineering has an outstanding orderbook of SGD13.3bn, which provides revenue visibility for two years. While Aerospace (9M18: SGD1.6bn, 9M17: SGD2.3bn) and Electronics (9M18: SGD1.8bn, 9M17: SGD1.5bn) have been registering steady order wins, Marine has started to witness new order wins after a few years of hiatus.

Reiterate BUY.

  • ST Engineering has delivered a 5.5% return YTD and outperformed the STI Index by 15.2%. ST Engineering could continue to outperform, amidst a revival in earnings growth, continuing order wins and a likely completion of the MRAS acquisition.
  • With a strong balance sheet and more than 20% ROE, ST Engineering is trading at 17.0x 2019F P/E, which is below its 5-year forward P/E mean of 19x.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 3.970 SAME 3.970

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