ST Engineering - CGS-CIMB Research 2019-11-11: Merits Of Diversification


ST Engineering - Merits Of Diversification

  • We would have been spot on in our 3Q19 estimate of S$150m without the one-off S$14m Hornbeck claims. 9M at 70% of our and consensus FY19F.
  • Key highlights in 3Q19:
    1. end of programme review in aero resulted in super profits in CERO and
    2. commendable contract wins for aero and electronics.
  • Our blended Target Price is up to S$4.47. Buy on share price weakness. Catalysts: stronger MRAS and contracts wins; risks: global slowdown. Maintain Add.

3Q19 was in line, excluding marine’s well-flagged Hornbeck claims

  • ST ENGINEERING (SGX:S63)’s 3Q19 profit of S$139m included S$14.2m of provision for claims for arbitration proceedings with Hornbeck Offshore. See ST Engineering Announcements; ST Engineering Latest News.
  • The arbitration had been flagged since Feb 2017 with Hornbeck claiming US$48.7m and ST Engineering counter-claiming US$2.4m in a dispute over the design and construction of vessels in 2011. The final provision was announced in Oct as ST Engineering was ordered to pay US$18m. Excluding this, group profit was S$150m (+9% q-o-q and +11% y-o-y), spot on with our expectations but below consensus of S$158m.
  • Similarly, the marine segment’s net profit would have grown 23% q-o-q to S$17.6m without this, lifted by strong growth in rig and ship repair in the US and shipbuilding in Singapore.

MRAS growth firm but noises from other costs in aerospace

  • The consolidation of MRAS continued to yield strong profits (c.S$22m in 3Q19, or 33% of aerospace profit of S$65m). Production ramp-up is according to Airbus demand of c.60 units/month. However, we adjust our FY19-21F profit for aero to account for
    1. delays in engines from customers which had a ripple effect on certification approvals and
    2. delays in the relocation of the pilot training school from Balarat to Jandakot that has plagued Aircraft Maintenance & Modification (AMM) since 1Q19 as well as
    3. higher prototype costs for the A321.
  • Still, we are looking at c.+14% y-o-y profit growth for Aero in FY20F.
  • Order momentum was impressive at S$1bn in 3Q19, YTD at S$3.1bn (2018: S$2.1bn).

More Smart City contract wins for electronics

  • Electronics contract wins also levelled up from c.S$560m/quarter in 2016-18 to c.S$780m/quarter in 2019, with more smart-city related projects. Notably, in 3Q19, it secured S$833m of new contracts with a bulky c.S$300m smart-city related next-generation emergency responses management system for a public safety agency out of Singapore.
  • YTD wins for electronics totalled S$2.35bn and could hit a record c.S$3bn if the momentum continues. 3Q19 net profit of S$51.5m, +16% q-o-q and -7% y-o-y, was in line with our forecast of S$51.8m. The next key driver for electronics could come from the new satellite communication business (Newtec) consolidation that begins in 4Q19.

Maintain ADD with higher Target Price of S$4.47

Streamlining Land Systems and others segment

  • The amalgamation of two entities in Land Systems (LS) resulted in the reversal of tax credit from prior years and dented LS net profit to S$15.1m (-26% q-o-q, - 14% y-o-y) in 3Q19. Profit was up 10% y-o-y excluding this.
  • We believe this is part of ST Engineering’s efforts to streamline its operations, which spans across the “others” division, swinging into a S$4m profit in 3Q19 (1H19: S$3.6m losses per quarter). Miltope US has been steady.

Lower expectations on Aerospace from 20% y-o-y to 14% y-o-y

  • We had previously expected aero’s profit to grow by 20% y-o-y in FY20F to S$312m on the back of a full-year consolidation of MRAS. We now expect a 14% y-o-y increase to S$293m. The fundamentals for MRAS are still strong and we believe the ramp-up in production could still hit 60-65 units/month in FY20F. We still expect net profit of c.S$76m from MRAS in FY20F.
  • Given the development thus far in 9M19 in AMM, we believe it is prudent to factor in longer gestation for passengers to freighters (PTF) conversion of the A321 aircraft as a result of delays in the Supplemental Type Certification (STC) approval.
  • In addition, product mix for its German subsidiary, EFW, could also be shifted, lowering the workload for composite floorboard panels for certain aircraft. Upside could come from stronger-than-expected MRAS profit contribution.

Newtec’s integration costs of S$20m in total

  • Even with integration costs, we expect the new sitcom business, Newtec, to be earnings accretive (c.S$10m in FY20F) to ST Engineering. Management guided for a total of S$20m of integration costs. We believe most of the costs will be incurred in FY20F.

Land systems to grow 44% y-o-y in 2020 with more deliveries

  • We forecast LS’s profit for FY20F to be S$99m (+44% y-o-y) on the back of absence of tax losses and ramp-up in delivery of the Hunter Armoured Fighting Vehicle (AFV) from 1Q20F. The delivery visibility is firm for three years from 2020.
  • In addition, the progressive delivery of 50 units of three-door double-decker buses to Singapore Land Transport Authority should sustain earnings growth.

Marine segment: more options to be converted, divested Ropax

  • On 11 Oct, Marine announced that it had sold its non-core roll-on/roll-off passenger vessel (ROPAX), MV Nova Star to Polish ferry operator, Polferries. The vessel has been on a bareboat charter to Polferries since Sep 2018. There is a gain from disposal of c.S$4m in 4Q19.
  • We expect marine to grow by 9% y-o-y in FY20F to S$57m, backed by the execution of orders won since 2018. Note that the Polar Ice Breaker contract (S$1bn) will only start to contribute meaningfully from FY21/22F.
  • We expect more contracts to be announced from existing options, e.g. the Naval Sea Systems Command contract of Auxiliary Personnel Lighter Small APL Class Berthing Barges (S$331m awarded in 2018 including four options to be exercised in 2019-2022).

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-11
SGX Stock Analyst Report ADD MAINTAIN ADD 4.47 UP 4.360