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

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

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.

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.

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 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’ 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’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..

We believe the double-digit profit growth in FY20F could keep valuations at a premium amidst a weak macro backdrop, sustained by order book of S$15.3bn. Our Target Price is still based on blended valuations (DCF, dividend yield and 21x CY21F P/E).
See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-24

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