ST Engineering - RHB Invest 2019-12-19: Should Continue To Outperform In 2020

SINGAPORE TECH ENGINEERING LTD (SGX:S63) | SGinvestors.io SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Should Continue To Outperform In 2020

  • Reiterate BUY, SGD4.55 Target Price with 14% upside plus c.3.8% yield.
  • ST ENGINEERING (SGX:S63)’s double-digit profit growth outlook for 2020-2021, record-high orderbook with more than two years of revenue visibility, positive FCF-generation capability, reasonable dividend yield and ability to undertake earnings-accretive acquisitions led it to outperform the Straits Times Index by 7.1% in 2019.
  • ST Engineering remains one of our sector and country Top Picks, with earnings contribution from the Newtec acquisition and continuing strong order wins as key re-rating catalysts.



Contribution from acquisitions to drive near-term earnings.

  • ST Engineering has reported strong profit growth in the last two quarters, aided by contributions from Middle River Aerostructure Systems (MRAS), a US-based OEM engine nacelle manufacturer that it acquired early this year. We expect this profit contribution to increase, in line with the ramp-up in output at MRAS.
  • We maintain that the recently completed Newtec and Glowlink acquisitions should remain earnings-accretive, despite SGD20m in integration costs.


Record higher orderbook offers strong revenue visibility.



Valuation basis.

  • We value ST Engineering on blended valuations, ie FY20F 22.0x P/E, 5.8x P/BV, and 11.0x EV/EBITDA, as well as DCF (WACC: 6.3%, LTG: 1.5%). The WACC is based on a risk-free rate of 2.2%. We use the Monetary Authority of Singapore 10-year (MASB10Y) bond yield as a proxy for the risk-free rate. The MASB10Y is yielding 1.7%. If we use this as a risk-free rate in our DCF valuation, our blended Target Price will increase to SGD4.72.
  • Key downside risks include failure to sustain its current rate of strong order wins, slowdown in its aerospace business, an increase in MRAS and Newtec integration costs, and lower-than-estimated contributions from recently completed acquisitions.





Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-12-19
SGX Stock Analyst Report BUY MAINTAIN BUY 4.550 SAME 4.550



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