ST Engineering - CGS-CIMB Research 2019-08-14: MRAS A Good Safe


ST Engineering - MRAS A Good Safe

  • ST Engineering's 2Q19 profit of S$138m was a miss vs. our S$143m forecast mainly due to slower-than-expected profit growth in electronics.
  • MRAS consolidation managed to offset the negative effects of Jet Airways’ grounding, resulting in 2% q-o-q growth in aerospace profit to S$64m.
  • S$0.05 interim DPS was declared. ST Engineering is a solid name to own for diversification.
  • Acquisition growth is key catalyst. Key risk is global slowdown.

Electronics missed on completion of projects; iDirect strong

  • ST Engineering (SGX:S63)’s 1H19 net profit of S$269m formed 45% of our previous full-year forecast and Bloomberg consensus'. The key variance was slower-than-expected profit growth in electronics; the division turned in a net profit of S$44m (+2% q-o-q, -5% y-o-y) vs. our S$49m forecast.
  • Completion of projects in communication & sensor systems (CSG) and large scale systems (LSG) caused the miss as seen in the drop in electronics’ revenue to S$501m (-12% q-o-q, -3% y-o-y). However, 1H19 PBT margin of 9.9% was in line with our forecast and management’s target of 10%.
  • Seasonally, the electronics division also tends to perform better in 2H. We taper our y-o-y profit growth forecast to 4% (previously 9%) on the back of lower revenue.

Aerospace profit up 2% q-o-q despite Jet Airways’ grounding

  • Aerospace lost S$32m of revenue and c.S$5m of profit in 2Q19 from the grounding of Jet Airways. S$350m will also be removed from the order book for the contracts on hand.
  • Despite this, profit grew 2% q-o-q, thanks to the consolidation of MRAS for 2.5 months in 2Q19, resulting in a 26% q-o-q increase in profit (to S$28m) for engineering & material services (EMS) where MRAS is recorded. MRAS contributed c.S$220m of revenue and c.S$18m of profit in 2Q19. EMS profit would have been higher if not for the prototype costs for the conversion of A321 passengers to freighters.
  • Management targets to increase the nacelle production capacity/month from 50 to 60 by end-19, and still expects ‘earnings accretion’ even with the

Land systems revert to favoured ground

  • The delivery of three units of Hunter Armoured Fighting Vehicle (AFV) in Jun resulted in land systems’ profit (S$20m, +34% q-o-q) beating our forecast of S$15m. Automotive profit jumped to S$8.7m (1Q19: S$1m) as PBT margin improved to 6.7% vs. FY18’s 4.1%.
  • R&D and preparation costs were incurred in the past few quarters leading up to AFVs’ delivery. No numbers were disclosed but management sees strong 3-year visibility in deliveries, especially from 2H20.
  • The progressive delivery of 50 units of 3-door double decker busses to Singapore Land Transport Authority (LTA) as well as the upcoming delivery of electric buses by end-19F should also sustain a stronger 2H19F.
  • Maintain ADD but with a lower Target Price to S$4.36, still based on blended valuations. We see the opportunity to buy on weakness.

LIM Siew Khee CGS-CIMB Research | 2019-08-14
SGX Stock Analyst Report ADD MAINTAIN ADD 4.36 DOWN 4.430