ST Engineering - RHB Invest 2019-02-22: Continuing On The Growth Path; Keep BUY


ST Engineering - Continuing On The Growth Path; Keep BUY

  • Keep BUY with a new SGD4.10 Target Price from SGD3.97, 11% upside and 4% FY19F yield, as we roll forward our valuations to 2019.
  • ST Engineering should continue to register a profit growth revival, with 2019F growth to exceed the 9% registered in 2018. 2019F profit growth should be aided by ongoing contributions from Aerospace, delivery of smart city-related contracts in and outside Singapore by Electronics, and defence-related contracts and improvement in earnings for Marine.
  • The completion of the MRA Systems (MRAS) acquisition could be a key re-rating catalyst.

2018 results announced on 21 Feb were in line.

  • Excluding the one-off items, SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering)'s 2018 profit of SGD527m was in line with our (SGD531m) and consensus (SGD542m) estimates.
  • Weak PBT growth from Aerospace was offset by strong contribution from Electronics and a turnaround to profitability by Marine. Land Systems registered a y-o-y decline in PBT. Recurring NPM improved to 7.9% in 2018 from 7.4% in 2017.

Strong orderbook and revenue visibility.

  • ST Engineering reported an outstanding orderbook of SGD13.2bn, for which SGD4.9bn will be delivered in 2019. The orderbook provides revenue visibility for two years. Including the Marine order wins announced in 3Q18 and 4Q18, ST Engineering reported order wins worth SGD5.2bn in 2018, of which Aerospace and Electronics accounted for SGD2bn and SGD2.2bn.
  • Baring the risk of a trade war escalation, ST Engineering remains confident of witnessing a revival in Aerospace order wins in 2019.

Continuing on track for revival in earnings growth.

  • We expect the group to deliver c.13% earnings growth in 2019 (consensus: c.16%). Based on our estimates, much of this growth is expected to come from Aerospace and Electronics. However, we believe that improvements in Marine’s profitability will also be a factor in driving 2019 profit growth.

Completion of the MRAS acquisition could be a re-rating catalyst.

  • ST Engineering remains confident of completing the acquisition of MRAS by end-1Q19. Based on back-of-the-envelope calculations, the acquisition could lift our earnings estimates 4-5%.
  • We have not factored the MRAS acquisition into our estimates yet.

Forecasts and risks.

  • We fine-tune our 2019-2020 estimates to account for the lower-than-expected profit contributions from Land Systems’ business in 2018.
  • Failure to register a revival in order wins, delays in the completion of the MRAS acquisition, lower contributions from the MRAS acquisition, and an unfavourable outcome for Halter Marine’s arbitration with Hornbeck are some of the key risks.

Shekhar Jaiswal RHB Securities Research | 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 4.10 UP 3.970