ST Engineering - DBS Research 2019-04-25: Headed For A Bumper Year Of New Order Wins

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Headed For A Bumper Year Of New Order Wins

ST Engineering's S$1bn contract win (S$2.6bn including options) from US Navy for Marine segment is a big medium-term boost.
Aerospace and Electronics segments also recorded stronger-than-expected contract wins in 1Q19.
Orderbook and earnings visibility improve further.

SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63) has reported new contracts worth S$3.1bn YTD in FY19, an impressive amount relative to the estimated S$5.2bn worth of contracts announced in full-year FY18, thus tracking well ahead of expectations.

Aerospace segment clinched S$1.3bn worth of contracts in 1Q19 (+154% y-o-y), including a 10-year service agreement starting in 2020 worth S$813m from a major long-time North American customer.
Electronics segment also saw strong S$818m worth of new contracts (+29% y-o-y), which is higher than the usually average quarterly run rate of around S$500m. Contracts include mobile communications solutions for Downtown Line 3 extension in Singapore, as well as various MRT-related contracts in the region, including in Bangkok (Thailand), Wuxi (China) and Taiwan.

ST Engineering’s wholly owned US subsidiary VT Halter Marine’s Mississippi yard has just secured a S$1.0bn contract from the US Navy, and this order alone exceeds the S$991m worth of orders announced for the full year in FY18 by the Marine segment.
The contract is for the detailed design and construction of the US Coast Guard (USCG) Polar Security Cutter (PSC), which is a heavy icebreaker vessel and is key to the US Navy and Coast Guard’s presence in polar regions of the Arctic and Antarctic. The first ship is expected to be delivered in 2024 and replace the ageing existing heavy icebreaker Polar Star, and the contract contains incentives for early completion.
The PSC contract is a multi-year programme and the plan for USCG is to acquire up to three multi-mission PSCs to replace the existing ageing USCG fleet of heavy icebreakers. Including options for the two additional vessels, the contract value would come to S$2.6bn. If the options are exercised, the second and third vessels are expected to be delivered in 2025 and 2027 respectively.

VT Halter Marine’s bid was reportedly chosen over two other finalists – Bollinger and Fincantieri groups - for the contract. As this is a highly complex high end project for the group, successful completion will raise the yard’s capabilities and add on to the track record of ST Engineering’s Marine segment, paving the way to secure other naval contracts in the region.

However, given that this is ST Marine’s maiden project in the construction of heavy ice breakers, risk to execution is high, allowing little margin for error, in our view and needs to be monitored.

ST Engineering received clearance from the Committee on Foreign Investment in the United States (CFIUS) regarding the acquisition of aircraft nacelle provider MRA Systems. The proposed acquisition was completed on 18 April 2019, which is largely in line with our expectations, for a net consideration of around S$683m, subject to post-completion adjustments for debt-like items and working capital.
The consolidation of MRAS with its strong growth prospects, among other factors, should help ST Engineering record close to double-digit earnings growth in FY19/20.
Completion of the recently announced acquisition of European satellite communications company Newtec is also anticipated to take place in 2H19, and further strengthen the inorganic boost.

Coupled with the multitude of shipbuilding contracts announced in FY18, the new massive S$1.0bn US Navy/Coast Guard contract should boost revenue. However, since the delivery is about five years away, revenue recognition and profit realisation is likely to be back-ended and may not materially impact group earnings in FY19/20. In addition, initial phases of learning curve for such a complex project would imply that contributions to bottom line will be minimal, if any, in our view.
We are more bullish on other segments - higher contract flows in Aerospace and Electronics divisions, may lead to higher-than-expected organic growth potential in the near term, and present upside risk to our forecasts.
We now expect to see ST Engineering’s orderbook at a record high S$14bn+ as of end-March 2019, to be announced with the upcoming 1Q19 results. This should underpin strong earnings visibility and boost investor confidence in ST Engineering’s growth prospects.
We continue to like the counter given its projected earnings growth acceleration of 8-10% each year for FY19F/20F, with potential upside revision. We currently have a BUY call on ST Engineering with a Target Price of S$4.15, and will relook our earnings forecasts and Target Price post the 1Q19 results release in early May.

Suvro Sarkar DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-04-25

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