ST Engineering - RHB Invest 2019-11-12: Improving Growth Outlook; Reiterate BUY


ST Engineering - Improving Growth Outlook; Reiterate BUY

  • Reiterate BUY with new SGD4.55 Target Price from SGD4.70, 14% upside plus c.4% yield. 3Q19 PATMI met. See ST Engineering Announcements. Near term outlook remains strong with c.SGD2.2bn order to be delivered in 4Q19.
  • We believe profit growth will improve in 2020-2021 from delivery of record-high orderbook and contribution from acquisitions.
  • ST Engineering should deliver 9.3% profit CAGR for 2018-2021F. Strong FCF generation capability and reasonable dividend yield makes it a defensive Top Pick. Earnings contribution from Newtec acquisition and continuing strong order wins should be key re-rating catalysts.

Record higher orderbook offers strong revenue visibility.

  • ST ENGINEERING (SGX:S63) reported an all-time high outstanding orderbook of SGD15.9bn, of which SGD2.2bn will be delivered in 4Q19 (4Q18 revenue was SGD1.8bn). The outstanding orderbook provides revenue visibility of c.2.5 years. Excluding the SGD1bn contract for the design and construction of the first Polar Security Cutter, ST Engineering has reported order wins worth SGD5.4bn in 9M19. This has already exceeded the reported order wins worth SGD5.2bn in 2018.

Contribution from acquisitions remain a key growth catalyst.

  • The Middle River Aerostructure Systems (MRAS) acquisition was completed in Apr 2019. In line with the increase in output at MRAS, we note that the acquisition made strong contribution to ST Engineering’s profit growth during last two quarters. The Newtec acquisition, which was completed in early Oct 2019, should remain earnings accretive despite accounting for c.SGD20m integration costs spread over 4Q19 and 2020.
  • Payment of SGD350m related to acquisition of Newtec will be booked in 4Q19, a provision for which was already made in 3Q19.

Adjust forecasts lower.

  • We lower our 2019F-2021F by 2-4% to account for integration costs related to the Newtec acquisition and higher-than-estimated operating costs. We continue to value ST Engineering on blended valuations, which is an average of P/E, P/BV, EV/EBITDA and DCF.
  • In our DCF valuation, we use the Monetary Authority of Singapore’s (MAS) 10-year bond yield (MASB10Y) as a proxy for the risk-free rate. Our current risk-free rate stands at 2.2%, while the MASB10Y is yielding 1.8%.If we use a risk free rate of 1.9% in our DCF valuation, our blended Target Price will increase to SGD4.65. See ST Engineering Share PriceST Engineering Target Price.

Key downside risks.

  • An end to the Halter Marine arbitration case, although with an unfavourable outcome, has removed one of the key risks on earnings outlook.
  • Nevertheless, failure to sustain current strong order wins, the increase in MRAS & Newtec integration costs, and lower than estimated contribution from recently completed acquisitions are some of the key risks.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 4.55 DOWN 4.700