ST Engineering 1Q20 Quarterly Update - UOB Kay Hian 2020-05-18: Cautions That Both Aerospace & Electronics Sectors Would Be Impacted


ST Engineering 1Q20 Quarterly Update - Cautions That Both Aerospace & Electronics Sectors Would Be Impacted

  • ST Engineering’s quarterly update affirmed our cautious view on the aerospace segment, but we were surprised by ST Engineering’s guidance that the electronics segment was also impacted. Collectively, the two segments accounted for 73% of revenue in 2019.
  • We also believe that a recovery in the aerospace segment is going to take longer than envisaged and we have consequently lowered revenue, profit and dividend forecasts for 2021.
  • Maintain HOLD. Target price: S$3.50.
  • Suggested entry price range: S$3.00-3.10.

ST Engineering guides for a 5-15% yoy decline in revenue for 2020.

  • ST Engineering (SGX:S63) guided that both the aerospace sector and the electronics sector have been impacted by the COVID-19 outbreak.
  • For the aerospace sector, airlines are deferring airframe and component repair works.
  • As for the electronics sector, some of the tenders have been put on hold and there are delays in the delivery schedules.
  • The Land System’s division is largely unaffected due to its high defence exposure, though ST Engineering indicated there have been delays in the export of ammunitions and the delivery of EV buses.
  • The company indicated that in Singapore, its hangars, shipyards and automotive factories are operating as essential service providers.
  • ST Engineering also guided that it will recognise S$4.5b in orderbook for the remaining nine months. At the start of the year, ST Engineering had guided that it will recognise S$5.9b in orders. Based on that, we believe that orderbook related revenue will not be significantly impacted.
  • Overall, the guidance is in line with our estimate of a 10% y-o-y decline in revenue. We have assumed a 16% y-o-y decline in net profit for 2020.

Diversified revenue base, defence exposure and geographical diversification should mitigate impact to earnings.

  • In addition, ST Engineering announced that it had secured S$1.6b in contracts in 1Q20 and orderbook stood at a three-quarter peak as at 1Q20. ST Engineering also announced that they had issued US$750m in 1.5% coupon 5-year notes, which will be used to refinance existing short-term debt. The coupon was said to be the lowest ever for a Singapore corporation.
  • Locally, ST Engineering is involved with surveillance and monitoring, the use of security robot and infrared screenings, mask production, contact tracing and command and control at hospitals. These measures should also lead to incremental revenue.

Aerospace sector utilisation stood at 85% in 1Q20 and has since eased to 60%, implying close to a 30% y-o-y decline in related revenue.

  • ST Engineering indicated that both the airframe maintenance and components & engine segments were equally impacted. MRA Systems (MRAS) has similarly been affected by Airbus’s reduction in production rate by a third, while panel maker Elbe Flugzeugwerke (EFW) is fading supply chain constraints. ST Engineering’s “Pax to Freighter” programme has also been hit by supply chain disruptions, though we believe that such disruptions should ease swiftly as businesses resume operations.
  • ST Engineering also believes that it is better placed than other maintenance and repair (MRO) companies as it has a high exposure to airlines with high domestic exposure. Domestic air travel is likely to recovery faster than international air travel. Even so, ST Engineering acknowledged that more stringent airport checks and safe distancing within airports could impact traffic recovery.
  • For now, we stand by the view that a recovery in MRO will take longer than two years to return to pre-COVID-19 levels.

Marine sector less affected due to defence-related works.

  • As for commercial ship repair, ST Engineering noted work force disruptions have led to lower works and new shipbuilding programmes are also being deferred to conserve cash.

STE guided that the Job Support Scheme (JSS) could lead to greater than S$100m in cost savings.

  • We had earlier factored in S$140m in gains from the JSS previously. We now raise this to S$180m. ST Engineering also indicated that the JSS would not be taxable income.

Aerospace and electronics sector accounted for 72% of revenue in 2019.

  • We had earlier expected the aerospace division and the marine segment to be more impacted than the electronics sector. How the electronics sector is larger than the marine segment and collectively both the electronics and the aerospace segment accounted for 72% of revenue in 2019.
  • While, we believe that the electronics sector would be less affected by a cyclical slowdown, we now expect revenue to decline by 11.2% y-o-y vs the 10.6% y-o-y decline expected previously. We also believe that a recovery would be more long drawn for the aerospace sector and 2021’s earnings are unlikely to show y-o-y growth due to significant non-recurring income.

Maintain HOLD with a marginally lower target price of S$3.50 (previously S$3.60).

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.50 DOWN 3.600