ST Engineering - UOB Kay Hian 2019-02-22: 4Q18 Slight Negative Surprise, But Should Fare Better In 2019

SINGAPORE TECH ENGINEERING LTD (SGX:S63) | SGinvestors.io SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - 4Q18: Slight Negative Surprise, But Should Fare Better In 2019 On S$1.1b Increase In Orderbook Recognition

  • Portfolio rationalisation costs and recognition of the MRAS acquisition cost led to ST Engineering missing expectations for the full year. Still, long-term fundamentals have not changed.
  • In fact, ST Engineering has guided for a S$1.1b increase in orderbook revenue for 2019. This should lead to close to 6% top-line growth for the pre-M&A business in 2019, which we believe should boost margins. We thus maintain our BUY recommendation.
  • Target price: S$4.06.



4Q18 RESULTS


Headline 2018 net profit declines 26%, 4% and 8.9% below ous and street expectations.

  • SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering)’s 4Q18 net profit included S$29.5 in one-off charges as well as medium term notes (MTN) related savings of S$4.9m (net S$24.6m charge). The one-off charges include approximately S$12m recognition of acquisition cost of MRAS, S$3m from the divestment of a US pilot training school, S$12m in loss on disposal of VT Leeboy India and another S$1.95m in impairment in automotive MRO business in Brazil.
  • 4Q18’s earnings also included S$23.5m (+33% y-o-y) in inventory obsolescence charges for the aerospace and land systems division. Excluding one-offs, 4Q18 would have risen by 1% y-o-y.
  • ST Engineering declared a final dividend of 10 S cents, uncharged taking total payout to 95% for 2018.
  • Orderbook remained flat y-o-y at S$13.2b but ST Engineering has guided that S$4.9b of the orderbook is expected to be delivered in 2019 (2018: S$3.8b). This suggests scope for higher top-line growth in 2019. Operating cash flow before working capital changes but after taxes rose 5.7% y-o-y.

Aerospace: Revenue and earnings fell 13% and 27% yoy respectively for 4Q18 but the latter was mainly due to one-off charges.

  • The decline in revenue was due to lower for passenger to freight (PTF) conversions and a decline in engine maintenance work. The decline in the latter can be attributed to slow pace of A320 and B737 aircraft deliveries, which meant that airlines continued to use older aircraft.
  • ST Engineering has also yet to receive Supplemental Type Certificates (STC) for the A321Neo. Thus, the slowdown in the sector was not due to cyclical challenges. However, ST Engineering has indicated that it remains optimistic on long-term growth and pointed to increased hangar capacity at Pensacola, MOU with Vietnam Airlines and expansion in composite panel manufacturing as key growth drivers. Excluding the recognition of MRAS acquisition costs and loss on disposal of pilot training centre, aerospace net profit rose 1% in 2018.
  • ST Engineering also guided that its exposure to cash-strapped Jet Airways is fully protected.
  • ST Engineering secured contract wins of S$2.1b in 2018, down 26% y-o-y.

Electronics: 17% yoy decline in PBT for 4Q18 was attributed to poorer sales mix.

  • Some contracts are recognised only upon completion, while some are recognised on a percentage completion basis. Revenue grew for all sub segments in 4Q18. The division secured S$2.2b (-4.8% y-o-y) in new contracts in 2018.

Marine division’s PBT rose 357% as margins improved across all segments.

  • This was the fourth sequential improvement in PBT margins for the shipbuilding segment, with PBT margins amounting to 2.6% in 4Q18.
  • ST Engineering expects shipbuilding to remain on track with upcoming delivery of two Littoral Mission Vessel (LMV) and ATB Tug in 2019. This should hold scope for improvement in earnings for the marine division in 2019, although the commercial business is likely to still face headwinds from oversupply in the OSV market.

Other segment reversed from a pre-tax loss of S8.7 to a PBT of S$7.9m in 4Q18. This was mainly due to savings on MTN related cost savings.

  • Miltope, which makes ruggedised keyboards, still remained in the red for the quarter.


STOCK IMPACT


A complex quarter, but outlook based on orderbook recognition is positive.

  • ST Engineering guided that it will recognise S$4.9b in revenue in 2019, S$1.1b higher than 2018 and this does not include revenue arising from the acquisition of MRAS. Typically, orderbook related revenue accounts for about 57% -60% of revenue.
  • We also believe that ST Engineering had secured a substantial aircraft maintenance order from Qantas, but is not at liberty to disclose that. Thus, ST Engineering’s revenue excluding that of MRAS is likely to rise by close to 6% vs the 2.6% y-o-y rise, underpinned likely by aerospace, electronics and marine contracts.


EARNINGS REVISION/RISK

  • We lower our net profit estimates for 2019 by 2.4% as we assume integration related costs at MRAS.


VALUATION/RECOMMENDATION

  • Maintain BUY with an unchanged target price of S$4.06. At our fair value, ST Engineering will be trading at 21.3x 2019F PE.


SHARE PRICE CATALYST

  • Approval for MRAS acquisition and lower losses at Miltope.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 4.060 SAME 4.060



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