ST Engineering - Maybank Kim Eng 2019-08-14: Run Its Course For Now


ST Engineering - Run Its Course For Now

2Q19 broadly in line but upside muted; Downgrade to HOLD

  • Operationally, ST Engineering (SGX:S63)'s 2Q19 was in line with expectations with EBITDA up 25% y-o-y /17% q-o-q, boosted by the MRAS integration in April; 1H19 EBITDA reached c45% of FY19E. But PATMI was lower than expected due to a higher D&A run-rate post-integration than we initially estimated.
  • We cut FY19F/20F/21F PATMI by 7%/6%/5% from raising D&A expenses. Our DCF-based SGD4.30 Target Price (WACC 8.1%, TGR 2%) is unchanged.
  • The c24% share price increase in the past year now leaves limited upside. Downgrade to HOLD from BUY.

Underlying business ticking along as expected

  • ST Engineering's 2Q19 revenue grew 8% y-o-y /3% q-o-q driven by Aerospace and Land Systems segments. 1H19 revenue accounted for 43% of FY19E and we estimate 2H19 should be better as the MRAS acquisition integration took place only in April.
  • Group PBT margin improved 2ppt y-o-y to c10% driven mainly by the recovery in Marine by 5ppt to 12%.
  • Marine posted a sixth straight quarter of PBT improvement and the contract win of SGD1b (SGD2.6b including options) from the US Navy should help sustain this trajectory.
  • The balance order book is at an all-time high of SGD15.6b.

Cut FY19E-21E PATMI from higher D&A burden

  • A negative in the 2H19 results was a sharp 65% y-o-y /28% q-o-q increase in depreciation and amortisation after the MRAS integration, much higher than we had initially estimated. The lion’s share of the increase came from goodwill amortisation.
  • In our view, going forward there could be additional pressure on the D&A front as other recently announced large acquisitions like Newtec Group (for SGD383m) also involve a high level of intangibles and goodwill. We cut FY19E/20E/21E PATMI by 7%/6%/5% from increases to D&A estimates.

As good as it gets for now

  • While we remain optimistic on ST Engineering’s growth prospects, the c27% share price performance in the past year leaves little room for upside to our valuation estimates when weighted off against an already all-time-high backlog and integration and execution risks of various new investments. See ST Engineering's share price.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-08-14
SGX Stock Analyst Report HOLD DOWNGRADE BUY 4.300 SAME 4.300