ST Engineering - UOB Kay Hian 2020-02-25: 4Q19 Core Earnings Rise 19% Y-o-y; Earnings Momentum To Continue In 2020


ST Engineering - 4Q19 Core Earnings Rise 19% Y-o-y; Earnings Momentum To Continue In 2020

  • The securitisation of aircraft assets and scope for higher smart city contracts along with potential B-52 nacelle contracts wins should continue to generate interest in ST Engineering.
  • We are also impressed with ST Engineering’s proof of concept for converting diesel buses into electric buses and this again has scope for application beyond Singapore.
  • Maintain BUY. Target: S$4.46.

4Q19 Results

Earnings in line; even excluding the consolidation of MRAS, full-year earnings would have risen by 8% y-o-y.

  • ST Engineering (SGX:S63) also highlighted that 2019’s core earnings would have risen by 14% y-o-y instead of headline 17% y-o-y growth if one-off items including divestments, M&A costs and marine sector’s arbitration costs were excluded.
  • For 4Q19, core net profit would have risen by 19% y-o-y and earnings growth would have been underpinned by:
    1. 46% growth in core profits from the land system division,
    2. 21% y-o-y rise in aerospace division’s earnings due mainly to contribution from MRAS, and
    3. a 46% y-o-y rise in the shiprepair earnings from the marine segment.
  • Operating cash flow before working capital changes rose 27.7% y-o-y. Orderbook stood at S$15.3b (3Q19: S$15.9b) while final dividend remained unchanged at 10 S cents (total: S$0.15).
  • Positive guidance for orderbook recognition and not too perturbed by COVID-19. ST Engineering guided that it will recognise S$5.9m in orderbook contracts (S$1m more than 2019). Management also noted that the COVID-19 has had no material impact thus far and that growth trajectory will continue as long as COVID-19 related disruptions do not extend beyond Jun 20.
  • While aerospace division fared well, this was mainly due to higher profits from MRAS. The airframe maintenance sub-division’s PBT fell 39% y-o-y due to higher staff costs, arising from increased competition. The aerospace division also incurred higher impairment loss on trade receivables and inventory obsolescence charges related to write-down in rotables.
  • Divestment of 30 engines via Asset Backed Securitisation (ABS) likely to lead to divestment gains in 1Q20. ST Engineering announced that its leasing firm will securitise 30 engines via a US$257m fixed rate note, in three tranches as well as an equity note. ST Engineering will retain 10% of the equity note. After-market values for narrow-bodied engines have risen of late and thus we estimate that ST Engineering would be able to book in gains of at least 10% upon disposal in 1Q20. ST Engineering will also receive service fee as the asset manager and potentially benefit from the provision of maintenance on the engines.
  • ST Engineering’s yard in Singapore will not be impacted by the reduction in the dependency ratio ceiling (DRC) for the marine sector. In 2021, the DRC is expected to decline to 18% from 20%.
  • MRAS could be a contender for new B-52 bomber engines. However, the US Airforce has yet to submit a request for proposal (RFP) for replacement engines. Each B-52b employs eight engines and MRAS will be able to provide nacelles for all four engine options. The US Airforce has 76 B-52 aircraft in service and is currently using aged Pratt & Whitney engines.
  • Smart city revenue has already reached S$1.4b from S$1.0b in 2017. ST Engineering highlighted that it is actively seeking opportunities outside Singapore


Guidance for higher orderbook recognition in 2020 adds to confidence for revenue growth.

  • Cost control remains a key challenge for ST Engineering. Still, we are optimistic of earnings growth for 2020, underpinned by higher orderbook recognition, continued roll-out of Hunter Armoured fighting vehicle, likely contract wins for diesel to electric conversion of single-decker buses, divestment gains on ABS.
  • Orderbook could also receive a boost from B-52 engine nacelle replacement contract.


Maintain BUY.


  • Incremental contract wins.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-25
SGX Stock Analyst Report BUY MAINTAIN BUY 4.46 UP 4.340