ST Engineering - CGS-CIMB Research 2020-04-21: Deferring Growth


ST Engineering - Deferring Growth

  • Risk of order cancellations in ST Engineering (SGX:S63)’s order book (S$15.3bn) is low, but high likelihood of deferral especially aircraft maintenance as airlines are grounded.
  • We now expect ST Engineering’s earnings to decline by 3% y-o-y in FY20F (previously growth of 12%) as we reflect -30% y-o-y in aerospace revenue.
  • Reiterate ADD.
  • YTD ST Engineering share price (-15%) could have priced in concerns of growth pressure. Wait for weakness to buy.

S$1.6bn order win in 1Q20, electronics positive surprise

  • ST Engineering announced S$1.6bn of orders in 1Q20, comprising S$730m (+62% q-o-q) of electronics contracts which include smart mobility in India (new market), and data analytics from Singapore’s PUB.
  • Aerospace also won S$838m (-24% q-o-q) of new contracts which include A320 heavy maintenance and CFM56-7B engine contracts from Chinese airlines and MRO contracts announced during the Singapore Airshow in Feb. We expect aerospace order momentum to taper in the coming quarters due to Covid.

Defence made up 30% of revenue, electronics to see delays

  • ST Engineering also announced that in 1Q20, its land systems division secured phase 2 of the contract for the production and supply of the Hunter Armoured Fighting Vehicle (AFV) from the Singapore Ministry of Defence. Defence accounted for c.30% of ST Engineering’s revenue in FY19.
  • We forecast land systems to be the key support in this downturn with +17% y-o-y earnings growth in FY20F (c.17% of group profit). The schedule to ramp up deliveries of AFV previously secured is intact in 2020.
  • We consider electronics as defensive given that customer profiles are largely government agencies/large enterprises, but we expect delays in progressive completion of large-scale projects/smart cities, affected by global lockdown.

Aerospace sensitive to global aviation crisis - GFC and post 9/11

  • During the GFC in 2008-09, ST Engineering’s profit dipped 6% p.a. for two consecutive years in FY08-09, mainly due to aerospace and electronics (impairment of investments).
  • Aerospace downtrend started in 4Q08 as component and engines (CERO), which is more sensitive to changes in flight hours, incurred provision for doubtful debts for the bankruptcies of Skybus and Sterling Airlines. Revenue for aircraft maintenance (AMM) dropped 8.5% y-o-y in FY09 as airlines deferred maintenance schedules. Post 9/11, aerospace revenue was flat y-o-y in FY02 but PBT was down 6% y-o-y due to start-up losses as well as provision for debts for United Airlines that filed for bankruptcy then. See details in attached PDF report.
  • This time, we think provisions for doubtful debts are inevitable but could be lagged in 2H20 or 1H21, if any. We conservatively build in a 20-30% y-o-y drop in AMM and CERO revenues, reflecting the global lockdown, along with cut in PBT margin to c.8.4% (FY19: 9.6%) for aerospace on weak operating leverage.

Perennial pick in the index

LIM Siew Khee CGS-CIMB Research | 2020-04-21
SGX Stock Analyst Report ADD MAINTAIN ADD 3.86 DOWN 4.660