ST Engineering - RHB Invest 2019-08-15: Defensive Growth Story; Reiterate BUY


ST Engineering - Defensive Growth Story; Reiterate BUY

  • Reiterate BUY with new SGD4.70 Target Price from SGD4.45, 11% upside plus c.4% yield.
  • ST ENGINEERING (SGX:S63)'s 1H19 PATMI missed. However, SGD3.8bn of orderbook delivery and contribution from the MRAS acquisition should support a stronger 2H19.
  • ST Engineering offers strong growth visibility given its record-high orderbook, and expected contribution from the MRAS and Newtec acquisitions. Also, strong FCF generation capability and rising yield make the stock a defensive Top Pick. Timely completion of the Newtec acquisition and continuing strong order wins could be key re-rating catalysts.

2Q19 results missed.

  • ST Engineering's 2Q19 PATMI of SGD138.2m (+13% y-o-y) accounted only for 91% of our estimates.
  • The key earnings miss came from its aerospace segment, which saw Jet Airways, one of its engines customers, head into insolvency. In 2018, aerospace accounted for 50% of ST Engineering’s net profit.
  • Contribution from its electronics segment was also below estimates largely due to lower-than-estimated revenue.
  • Profit contribution from land systems (higher-than-estimated revenue) and marine (higher-than-estimated margin) segments came ahead of our estimates.

Strong orderbook and revenue visibility.

  • ST Engineering reported an all-time high outstanding orderbook of SGD15.6bn, of which SGD3.8bn will be delivered in 2H19. The orderbook provides revenue visibility of close to 2.5 years.
  • Including the SGD1bn contract for the design and construction of the first Polar Security Cutter, ST Engineering has reported order wins worth SGD4.6bn in 1H19. This is compared with the reported order wins worth SGD5.2bn in 2018.

Contributions from acquisitions, a key earnings growth catalyst.

  • The Middle River Aerostructure Systems (MRAS) acquisition, completed in Apr 2019, is expected to remain earnings accretive despite accounting for c.SGD10m of integration costs in 2H19 as well as in 2020. ST Engineering also remains confident of completing the Newtec acquisition by 2H19. We expect Newtec to start contributing to earnings from FY20F.

Adjust forecasts and raise target price.

  • We fine-tune our 2019F-2021F to account for the lower interest and other income. We value ST Engineering on blended valuations, which is an average of P/E, P/BV, EV/EBITDA and DCF. We lower our long term risk-free rate to 2.2% (from 2.5%).
  • We use the Monetary Authority of Singapore’s (MAS) 10-year bond yield (MASB10Y) as a proxy for the risk-free rate. If we use a risk free rate of 1.67% instead, which is where the MASB10Y is currently trading, our blended Target Price will increase to SGD4.85.

Key downside risks.

  • Failure to sustain current strong order wins, increase in MRAS integration cost, delay in Newtec acquisition, and an unfavourable outcome for Halter Marine’s arbitration are some of the key risks.

Shekhar Jaiswal RHB Securities Research | 2019-08-15
SGX Stock Analyst Report BUY MAINTAIN BUY 4.70 UP 4.450