SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - Strong End To 2019; Reiterate BUY
- Reiterate BUY, new SGD4.90 Target Price from SGD4.55, 17% upside with c.4% yield.
- ST Engineering (SGX:S63) – our country Top Pick – is well-positioned to deliver 10% profit growth in 2019-2022, aided by a record-high orderbook, contributions from new acquisitions, and through continuing investments to expand its capabilities in Aerospace and Electronics.
- The diversified, defensive nature of its business should enable ST Engineering to weather the near-term impact of the COVID-19 outbreak. Continuing strong order wins and earnings-accretive acquisitions remain key re-rating catalysts.
Strong end to 2019.
- ST Engineering's 2019 recurring PATMI of SGD589m (+12% y-o-y) accounted for 106% of our estimate. The earnings surprise for 4Q19 came from lower tax expenses and better profits for Aerospace.
- ST Engineering announced a final DPS of SGD0.10, implying a total 2019 DPS of SGD0.15 (unchanged y-o-y). Given the long-term nature of its businesses, the group has decided to publish its results on a half-yearly basis.
STE does not expect material impact from COVID-19 in the near term
- ST Engineering does not expect material impact from COVID-19 in the near term, if the current outbreak remains at current levels until the mid-year. About half of the impact from the outbreak, if any, will be felt by the Aerospace unit – where ST Engineering is already working with airlines to rearrange maintenance schedules around changes to the latter’s operations.
- We maintain that ST Engineering’s business and geographic diversity, as well as the long-term nature of its contracts, ensure that its revenue remains relatively shielded from short-term uncertainties.
Focused on long-term growth in Aerospace.
- ST Engineering will focus on growing its nacelle manufacturing after Middle River Aerostructure Systems (MRAS) aided strong profit growth in 2019. STE also remains focused on building Aerospace capabilities by setting up an airframe MRO capability in Vietnam, and pursuing new passenger-to-freighter conversion contracts.
- ST Engineering has securitised 30 engines that were held under its leasing business. This process will improve the group’s capital structure and will ensure that it remains the asset manager for engines, while continuing to receive service fees. Gains from this exercise will be booked in 1Q20.
Electronics to benefit from recent acquisitions.
- Growth in Electronics will be driven by contributions from its Newtec and Glowlink acquisitions. Revenues for its Smart City business, largely driven by Electronics, has grown 40% y-o-y in 2019 to SGD1.4bn and remains on track to reach a SGD2bn business by 2022.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
- Downside risks include failure to sustain its current rate of order wins, slowdown in aerospace business amidst the COVID-19 outbreak, higher Newtec integration costs, and lower contributions from acquisitions.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-02-25
SGX Stock
Analyst Report
4.90
UP
4.550
