ST Engineering - RHB Invest 2019-05-22: Defensive Growth Story; Keep BUY


ST Engineering - Defensive Growth Story; Keep BUY

  • Keep BUY, with a higher SGD4.45 Target Price from SGD4.10, 12% upside with 4% FY20F yield.
  • ST Engineering (SGX:S63) offers strong visibility on double-digit profit CAGR over FY19-21, aided by the execution of its record-high SGD14.1bn orderbook, and inorganic growth from the acquisition of MRAS and Newtec. This, along with its strong FCF generation capability and dividend yield, makes the stock a defensive Top Pick.
  • Timely completion of the Newtec acquisition and continuing order wins could be key re-rating catalysts.

Strong revenue visibility from record-high orderbook.

  • Amidst strong order wins by its Aerospace and Electronics businesses during 1Q19, ST Engineering reported an outstanding orderbook of SGD14.1bn (+5.2% y-o-y, +6.8% q-o-q) as at end-Mar 2019. This is a record high and offers two years of revenue visibility.
  • ST Engineering expects to recognise SGD4.2bn of its orderbook as revenue over the next three quarters. This provides scope for organic revenue growth and accounts for 76% of our estimated revenue for the rest of 2019.

Acquisitions to support growth from 2H19.

  • ST Engineering expects the Middle River Aerostructure Systems (MRAS) acquisition, completed in Apr 2019, to be earnings-accretive from 2H19. Management also remains confident of completing the Newtec acquisition by 2H19. The transaction expense (1% of purchase consideration) related to this acquisition will be recognised in 2H19.
  • We expect Newtec to start contributing to earnings growth from FY20.

Diversified business makes it relatively less prone to near-term risks from the trade war.

  • Although ST Engineering’s growth remains exposed to global economic cycles, its business and geographic diversity as well as the long-term nature of its contracts ensure that its revenue remains relatively shielded from short-term uncertainties created by the escalation in trade tensions between the US and China.

Raise estimates; Target Price based on blended valuation.

  • We incorporate potential earnings contributions from the Newtec acquisition and increase FY20-21F profit by 5-9%. We continue to value ST Engineering on blended valuations, ie 20.5x FY20F P/E, 5.5x FY20F P/BV, 11.0x FY20F EV/EBITDA and DCF (WACC: 6.8%, LTG:1.5%).
  • Our Target Price is based on FY20 estimates, as it fully captures profit contributions from recent acquisitions.

Key Risks

  • Key downside risks are weakness in aviation maintenance, repair and overhaul (MRO) demand and delays in Smart Nation initiatives amidst decelerating global economic growth.
  • Lower-than-estimated contributions from MRAS and Newtec acquisitions could also derail earnings growth.

Shekhar Jaiswal RHB Securities Research | 2019-05-22
SGX Stock Analyst Report BUY MAINTAIN BUY 4.45 UP 4.100