ST Engineering - CGS-CIMB Research 2020-02-24: Double-digit Earnings Growth Hard To Find


ST Engineering - Double-digit Earnings Growth Hard To Find

  • ST Engineering is one of a few SG large caps with double-digit y-o-y earnings growth in FY19 and FY20F and firm visibility.
  • 4Q19 profit of S$169m (+36% y-o-y) beat our S$160m forecast on stronger profit from munition & weapon in land and component & engine in aerospace.
  • Catalysts: qualification for major defence and commercial projects and sizeable order wins. 
  • Risks: global slowdown and prolonged Covid-19 impact.

Successful acquisition growth; growth momentum continues

  • ST Engineering (SGX:S63)’s FY19 net profit of S$578m (+16% y-o-y) is testimony to its successful acquisition growth, of which MRAS contributed c.S$45m. Group earnings would have only risen by 8% y-o-y without MRAS.
  • DPS of S$0.15 represented a lower payout of 81% vs. past three-year average of 95%. See ST Engineering Dividend History.
  • Assuming Covid-19 lasts till Jun 2020, management still hopes to maintain “growth momentum” in FY20F, even if aerospace could see a short-term impact from delayed aircraft maintenance due to disruptions in the aviation sector.

Aerospace reports strongest profit in years; asset recycling

  • Aero’s 4Q19 net profit of S$77m (+21% y-o-y, +18% q-o-q) was a record for years. Other than the consolidation of MRAS, CERO (Component, Engine Repair & Overhaul) clocked in a net profit of S$32m (+191% y-o-y, +11% q-o-q) due to a shift in program mix to more repair of parts and lower stocks provisions.
  • MRAS nacelle capacity servicing Airbus of c.62-63 units/month should sustain the Engineering & Material Services (EMS) profit in FY20F. The US$257m securitisation of 30 narrowbody aircraft at its 50%-owned JV TEAM (Total Engine Asset Management) could add one-off dividend distribution to aero. Assuming a coupon rate of 4% p.a, aero could receive c.$5m of annual asset management fee.
  • We are looking at 13% y-o-y in profit growth for aero in FY20F backed by better Aircraft Maintenance & Modification (AMM) after the divestment of its Australian pilot school in Nov 19. AMM’s profit grew 47% q-o-q to S$21m, or 27% of aero’s profit. Gestation effect should wear off for A321 passenger-to-freighters (PTF) in FY20F.

Land Systems’ strong defence pipeline; double digit growth

  • Land System’s 4Q19 net profit of S$26m (+77% q-o-q) was due to stronger-than-expected sales and profit recognised from munition & weapon division after securing new contracts from Asia Pacific, Middle East and Europe in 2019, which will also enhance profit visibility from FY20F.
  • Overall, we expect Land System’s FY20F net profit to grow 17% on the back of ramped-up delivery of the Hunter Armoured Fighting Vehicle (AGC), delivery of 20 units of Electric Bus as well as progressive delivery of 50 units of three-door double decker buses to Singapore Land Transport Authority in 2020.

Electronics’ revenue at five-year high but margins compromised

  • Electronics’ 4Q19 net profit of S$52m (+17% y-o-y, flat q-o-q) was in line with expectations. Revenue for FY19 grew by 7% y-o-y to S$2.3bn thanks to its consistent order wins. It won S$2.8bn worth of new contracts in 2019 vs. S$2.2bn in 2018. However 4Q19 PBT margins dipped to 8.5% (3Q19: 11.2%, 4Q18: 9.3%), bringing overall FY19 PBT margins to 9.8%. This is below it historical average of 10.6% over the past five years.
  • We believe the pricing competition as well as continuous investments in R&D could keep margins under pressure in the near term. We are looking at the division to grow its profit by c.4% y-o-y in FY20F.

Marine boosted by US ship repairs

  • Marine’s 4Q19 net profit of S$26m (+60% y-o-y, +541% q-o-q) was lifted by strong ship repair profit of S$17m (+46% y-o-y, +28% q-o-q). This is mainly thanks to the new yard, Halter Marine and Offshore, set up in May 19 in Pascagoula, Mississippi US, with a focus on the upgrade and repair of rigs, military and para-military commercial ships. The shipbuilding division remained profitable to the tune of S$1.9m in 4Q19.
  • We are looking at the division to grow its profit by c.19% y-o-y in FY20F on the absence of provision for claims for arbitration proceedings with Hornbeck Offshore in FY19..

Flight to safety proxy; maintain ADD

LIM Siew Khee CGS-CIMB Research | 2020-02-24
SGX Stock Analyst Report ADD MAINTAIN ADD 4.66 UP 4.470