ST Engineering - CGS-CIMB Research 2019-07-25: How High Can It Go?

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - How High Can It Go?

ST ENGINEERING (SGX:S63) secured c.$1.5bn of new aero and electronics contracts in 2Q19. This is slightly lower than the S$2.1bn in 1Q19.
In total, however, 2Q19 contracts were higher at S$2.5bn including the S$1bn Polar Security Cutter marine contract announced earlier on 24 Apr 2019.
Maintain ADD and Target Price of S$4.43 but we removed ST Engineering from our High Conviction list given its outperformance YTD and 52-week high.

Relative to 1Q19, aerospace and electronics contracts momentum slowed slightly. We hope this is due to timing differences and lumpiness of awards.
Aerospace won S$809m (1Q19: S$1.3bn, 2Q18:S$510m) in 2Q19. 1Q19 was lifted by a 10-year heavy maintenance contract for A300s and B757 with a North American operator. AirAsia X and Beibu Gulf Airlines maintenance were the key wins in 2Q19.
Electronics won S$702m (1Q19: S$818m, 2Q18:S$764m) in 2Q19. Contracts won were generally similar to the previous trend-smart mobility, satellite communications, Internet of Things, cybersecurity, public safety and security, and defence.
On a positive note, 1H19 contracts from aerospace totaled S$2.1bn, higher than 1H18’s of S$1.02bn and stronger hoh over 2H18 of S$1.04bn. Electronics’ 1H19 contracts won amounted to S$1.52bn, also stronger y-o-y and hoh (1H18:S$1.4bn, 2H18: S$786m).

We expect ST Engineering to post a 2Q19 net with the yoy growth from the absence of cost project.
Aerospace should clock in +4% y-o-y in net profit with little contribution from MRAS. However, we are watchful over management guidance on the potential loss of income as a result of Jetairways’ aircraft grounding. Aerospace had c. US$700m of long-term MRO contracts for Jetairways and JetLite’s fleet of 80 B737 NGs (see our report: ST Engineering - Longer-lasting Engine Upcycle).

At c.20x CY20F, ST Engineering is trading slightly above 10-year average. It last traded at +1s.d. of above 23x in early-2013 (yield craze) but subsequently capitulated together with FSSTI with its earnings disappointments in FY13-14 (-2% and -1% y-o-y).
This time, the double trade tensions, which could slow future stronger-than-expected capacity expansion from new acquisitions.
Our Target Price implies a forward P/E of 21x, or +0.5 s.d of its 5-year mean. At peak valuations share price would trade up to S$4.80, provided earnings do not disappoint.

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-25

SGX Stock Analyst Report ADD MAINTAIN ADD 4.430 SAME 4.430