ST Engineering - OCBC Investment 2019-05-16: Engineering A Better Future


ST Engineering - Engineering A Better Future

  • 11.4% y-o-y rise in 1Q net profit.
  • S$14.1b order book.
  • Good stock performance YTD.

Healthy set of 1Q19 results

  • SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63) delivered a 5.1% y-o-y rise in revenue to S$1.7b and an 11.4% increase in net profit to S$131.1m in 1Q19, such that the latter accounted for 23% of and 22% of ours and the street’s full year forecast, respectively.
  • The top-line growth was driven by a 34% increase in revenue from Land Systems to S$377m in 1Q19, as well as a 4% growth in Aerospace revenue to S$622m.
  • In terms of net profit, Marine saw the largest percentage increase at 38% for the quarter to S$12.0m, boosted by improved U.S. shipbuilding performance. This was followed by Electronics with an 8% expansion to S$43.4m and Aerospace with 6% growth to S$62.7m. Land Systems saw a 3% y-o-y fall to S$15.2m with the absence of favourable tax finalization adjustment.

Visibility for at least 78% of FY19 revenue forecast

  • ST Engineering has had a good start to the year in terms of contract wins, which have increased its order book to a high of S$14.1b as at end Mar. About S$4.2b of this is to be delivered in 9M19.
  • ST Engineering has also completed the acquisition of MRA Systems and is now focused on integrating the business with the Aerospace segment.
  • As for its Newtec acquisition, this is expected to be completed in 2H19, and when combined with the existing satellite communications businesses, this should further enhance ST Engineering’s value proposition for its Smart City initiatives.

Better traction in Smart City and improvement in Marine

  • YTD, ST Engineering’s share price is up 12%, outperforming the STI by about 7%, based on 15 May’s closing prices. (see also: Straits Times Index constituents share price performance)
  • Potential catalysts going forward include the US Postal Service’s tender for next-gen electric trucks, as well as the exercising of options for two polar security cutters by the US Coast Guard.
  • We expect further growth in order book over the longer term with better traction in Smart City solutions and export of defence solutions.
  • We tweak our assumptions and rolling forward our valuations, our fair value estimate is raised from S$4.07 to S$4.22. Maintain BUY.

Low Pei Han CFA OCBC Investment Research | 2019-05-16
SGX Stock Analyst Report BUY MAINTAIN BUY 4.22 UP 4.070