ST Engineering - RHB Invest 2020-04-28: Expect To Continue Outperforming STI; Keep BUY


ST Engineering - Expect To Continue Outperforming STI; Keep BUY

  • Reiterate BUY, new SGD4.15 Target Price from SGD4.65, 28% upside and c.5% 2020F yield.
  • While 2020F profit is expected to decline amidst weak profits for Aerospace and potential delays in order delivery for other business segments, earnings should improve in 2021 as the global aviation industry starts to gradually recover.
  • We maintain that ST Engineering (SGX:S63) will continue to outperform the STI, as its well-diversified business portfolio and a record-high orderbook will enable it to better withstand current economic weakness vs other large-cap stocks in Singapore.

Aerospace order wins to moderate.

  • ST Engineering announced SGD838m (-36% y-o-y, -24% q-o-q) worth of order wins for Aerospace in 1Q20. The maintenance, repair and overhaul (MRO) contracts announced in the order win includes A320 heavy maintenance and CFM56-7B engine maintenance contracts from Chinese airlines, and a component maintenance-by-the-hour contract from an ASEAN airline to provide component maintenance services for its entire fleet of B737 and Bombardier Q400 fleet. The order win also included contracts that were announced during Singapore Airshow 2020.
  • We expect order wins for Aerospace to moderate, as global airlines have cut their fleet in response to weak aviation traffic caused by the COVID-19 pandemic.

Electronics and land system to support near-term earnings.

  • For Electronics, ST Engineering announced SGD730m worth of contracts for products and solutions in smart mobility, cybersecurity, data analytics, as well as training and simulation.
  • ST Engineering has expanded its footprint in India by clinching contracts to provide its mobility products and solutions for upcoming metro operations in Chennai and Mumbai. ST Engineering’s Land Systems also secured a Phase 2 contract for the production and supply of the Hunter Armoured Fighting Vehicle from the Singapore Ministry of Defence.
  • We expect growth in Electronics and Defence (Land Systems) to partially offset the weakness in aerospace business in 2020F.

Lowering earnings.

  • We cut FY20-22F earnings by 3-9%, largely to account for lower earnings from Aerospace. Aerospace earnings will decline in 2020F as global airlines that are in cash conservation mode, will defer MRO spending. Middle River Aerostructure Systems (MRAS) should also see a decline in production of nacelle components as Airbus, one of its key customers, has cut aircraft production by one-third, and is looking at deep job cuts in order to survive the current cash bleed.

Valuation basis.

Shekhar Jaiswal RHB Securities Research | 2020-04-28
SGX Stock Analyst Report BUY MAINTAIN BUY 4.15 DOWN 4.650