SINGAPORE TECH ENGINEERING LTD (SGX:S63)
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:
- 46% growth in core profits from the land system division,
- 21% y-o-y rise in aerospace division’s earnings due mainly to contribution from MRAS, and
- 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
STOCK IMPACT
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.
EARNINGS REVISION
Maintain BUY.
- We raise our 2020 net profit forecast by 3.7%, factoring in divestment gains on ABS.
- We continue to value ST Engineering on an EV/Invested Capital basis and have raised our fair value from S$4.32 to S$4.46. At our fair value, ST Engineering will be trading at 21.3x 2020’s estimated earnings.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
SHARE PRICE CATALYST
- Incremental contract wins.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-02-25
SGX Stock
Analyst Report
4.46
UP
4.340
