ST Engineering - UOB Kay Hian 2019-04-25: Bumper Contract Wins & Recent M&As Should Boost Earnings Beyond 2021

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Bumper Contract Wins & Recent M&As Should Boost Earnings Beyond 2021

We are enthused by ST Engineering’s year-to-date S$3.1b in contracts, which included a surprise S$1b naval contract, and could potentially be upsized to S$2.6b if options are exercised. The win should boost the marine division’s earnings beyond 2021. Similarly, the aerospace sector’s 10-year maintenance contract is expected to boost recurrent earnings.
With these contracts and recent M&As, ST Engineering’s vision of growing revenue and earnings by 2- 3x global GDP growth should come to fruition.
Maintain BUY. Target: S$4.70.

To recap, SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63) announced yesterday that its wholly-owned US subsidiary, VT Halter Marine, had secured a US$746m contract to build a single Polar Security Cutter (PSV), previously known as heavy icebreaker. The US government has 100 days to review the contract and if all goes well, the first delivery is expected to be completed by 2024.
We expect ST Engineering to recognise revenue from steel plate cutting and partial keel laying from 2021.
VT Halter Marine has also secured an option to build two similar PSVs. If all the options are exercised, the total value of the contracts will amount to US$1.9b or S$2.6b.
While we have not factored in the possibility of a full exercise of the option, we believe that it is highly likely. Press reports have quoted the department of Homeland Security as requiring a total of six icebreakers to compete with other naval powers.

The orderbook win is substantially better than expected, as ytd ST Engineering has already secured 65% of 2018’s S$4.8b in contract wins. The aerospace sector received contracts worth about S$1.3b (+155% y-o-y), including a 10-year maintenance contract to service 160 aircraft for a new airline customer, with earnings contribution expected to kick in from 2020.
The electronics sector received contracts worth S$818m (+29% y-o-y), which include smart rail mobility contracts for Bangkok MRT, Wuxi Metro and Taiwan Railway Authority’s trains.
Taking into the latest win by VT Halter Marine, ytd order win by the marine division amounts to S$1,014m, which is higher than the S$991m of contracts won for the whole of 2018. ST Engineering also secured other contracts that were not disclosed because of customer confidentiality.

Aside from recent M&A, ST Engineering’s guidance on orderbook recognition would already provide revenue and net profit growth for 2019.
There is also the possibility that the current order wins could boost 2019's revenue by a greater quantum than ST Engineering's initial guidance. If so, earnings could rise by a greater quantum than street’s estimates.

The contract win should accelerate the recovery for the shipbuilding sub-segments, which had during the past two quarters already showed sequential recovery into the black, despite being in the red for 2018. We now believe that the shipbuilding segment is likely to be in the black for 2019, while the contract win should boost margin from 2021.
PBT margin for 2018 for the marine segment was 8.8% and we expect margins to at least rise by between 2-3 ppt by 2021. Meanwhile, the acquisition of MRAS and Newtec should also contribute to net profit and EPS growth for 2019 and 2020.

The segment had a PBT margin of 14.4% as at end-18 and thus incremental earnings could amount to at least S$10m, just from the division.

We raise our 2019/20/21 earnings growth assumption by 0.5%, 4.2%, and 5% respectively. The slightly lower tweak in earnings growth for 2019 is due to the fact that we had previously anticipated that MRAS acquisition would have been completed by end-Mar 19, but it was completed on 18 Apr 19.
2020’s earning revision is mainly due to higher aerospace earnings and partial earnings recognition from the naval contract.

We continue to value ST Engineering on an EV/Invested capital basis based on 2020’s earnings. Our long-term ROIC assumption is raised to 15.9% from 15.6%, while terminal growth rate is raised from 2.5% to 2.7%, due to the enhanced orderbook win. Our WACC assumption remains unchanged.
At our fair value, ST Engineering, will trading at undemanding 21.7x 2020’s earnings and an ROE of 28%.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-25

SGX Stock Analyst Report BUY MAINTAIN BUY 4.70 UP 4.400