ST Engineering - RHB Invest 2019-01-15: New Orders Wins For Marine Business


ST Engineering - New Orders Wins For Marine Business

  • 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.
  • In addition to continuing order wins for its Aerospace and Electronics businesses, the recent revival in Marine order wins and completion of MRAS acquisition, could be key re-rating catalysts. 
  • Maintain BUY and SGD3.97 Target Price, 11% upside, with 4% yield.

Recent Marine order wins should alleviate some investor concerns.

  • While Aerospace and Electronics have been registering steady order wins and relatively strong earnings growth over last few years, losses from shipbuilding business under Marine have been a drag on earnings. However, recent order wins for Marine should improve its earnings outlook. In 3Q18, Marine secured c.SGD431m worth of contracts including options for its shipbuilding business, as well as the ship and rig repair segments.
  • Yesterday, SINGAPORE TECH ENGINEERING LTD (SGX:S63) announced SGD560m worth of contracts wins for Marine in 4Q18, revenue from which should start accruing during 2H19.

Completion of MRAS acquisition should re-rate the stock.

  • ST Engineering should be able to complete the acquisition of Middle River Aircraft Systems (MRAS) by end-1Q19. The acquisition, which will be fully funded by the USD-denominated debt, could lift our 2019F-2020F earnings by 4-5%.
  • We have not factored the MRAS acquisition in our estimates yet.

Recovery in earnings growth is on track.

  • We expect ST Engineering to deliver c.16% earnings growth in 2019 (consensus: c.13.4%). 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.

Building Aerospace capabilities is the key to growth.

  • ST Engineering aims to complete construction of its new airframe MRO capacity in Pensacola (US) by 2022. This new capacity would have four hangars and increase ST Engineering’s MRO capacity by 2.1m man-hours.
  • On the passenger to freighter (P2F) conversions, ST Engineering delivered the first A330 P2F aircraft to Egypt Air in Aug 2018 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.

Shekhar Jaiswal RHB Securities Research | 2019-01-15
SGX Stock Analyst Report BUY MAINTAIN BUY 3.970 SAME 3.970