ST Engineering - RHB Invest 2020-03-17: Remains a Long-Term Defensive Pick; Keep BUY


ST Engineering - Remains a Long-Term Defensive Pick; Keep BUY

  • Business and geographic diversity should ensure ST Engineering (SGX:S63) delivers revenue growth during 2019-2022 despite near-term economic uncertainties. Its record-high orderbook, earnings contribution from recently completed acquisitions and investments to expand its capabilities in the Aerospace and Electronics segments should deliver long-term earnings growth.
  • While weak earnings for 2020 is likely (from COVID-19), market seems to be pricing in more than our worst case scenario.
  • ST Engineering has outperformed STI by 3.6% YTD. See Straits Times Index (STI) Constituents share price performance.
  • Maintain BUY, unchanged target price with c.4% yield.

What is the market pricing in?

  • Based on our estimates and implied valuation, we assess that at the current share price, market seems to be discounting > 15% earnings decline for ST Engineering in 2020.
  • It is worth noting that since 2001, ST Engineering has never reported double-digit percentage net profit decline despite facing business headwinds during the SARS outbreak as well as global financial crisis.

Stress testing our 2020 estimates.

  • During its latest results analyst briefing, ST Engineering mentioned that it does not expect material impact from COVID-19 if the outbreak remains at current levels until mid-year. However, now that WHO has declared it a global pandemic, we foresee downside risks to the Aerospace, Electronics and Marine businesses.
  • Based on a stress test for the worst case scenario – where we assume 20-25% revenue decline for aircraft maintenance and engine overhaul businesses under Aerospace; large scale systems group under Electronics; and ship building and ship repair under Marine – we assess that ST Engineering could report 7-8% earnings decline in 2020. We believe this is lower than what the market is pricing in right now.

Long term growth drivers are still intact.

  • Gradual delivery of its record high orderbook, which stands at SGD15.3bn and offers over two years of revenue visibility, along with earnings contribution from its recently completed acquisitions of Middle River Aerostructure Systems (MRAS), Newtec and Glowlink should continue to drive earnings growth over the forecasted period.
  • Greater clarity on the magnitude of economic impact from COVID-19, continuing order wins and new earnings-accretive acquisitions could be the key re-rating catalysts.
  • 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, sharp slowdown in Aerospace MRO business amidst the COVID-19 outbreak, higher Newtec integration costs, and lower contributions from acquisitions.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-17
SGX Stock Analyst Report BUY MAINTAIN BUY 4.900 SAME 4.900