SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - Interrupted By COVID-19
- Aerospace to face weakness.
- Other segments less impacted.
- Defense-related work about a third of business.
Slightly less than half of net profit from aerospace last year
- The COVID-19 outbreak has put immense pressure on the global aviation industry’s profitability and cash flows. As Aerospace accounted for about 47% of ST Engineering (SGX:S63)’s net profit last year, this would have a knock-on effect on the group. Within the aerospace business, maintenance, repair and overhaul (MRO) accounts for one-third of the business.
- Significant downside pressure should be experienced in this segment as airlines defer maintenance schedules, and there would be idle fleet as well.
- Recall that ST Engineering does not really service Singapore Airlines (SGX:C6L) as Singapore Airlines has its own MRO provider, which is SIA Engineering (SGX:S59). As for the manufacturing side of aerospace, a reduction in production targets by plane manufacturers would also have negative spill-over effects on ST Engineering’s MRAS.
Other segments not as impacted
- As for ST Engineering’s other operations, Electronics accounted for 33% of FY19 net profit while Land Systems contributed 13%. The remaining 9% is from Marine. These segments are not really impacted though we note that there could be supply chain issues which may result in delays in production.
- Also, about a third of ST Engineering’s business is defense-related, which is less likely to be impacted by COVID-19.
Risk of a dividend cut?
- On a total returns basis, ST Engineering is down 16% YTD while the STI is down 19% over the same period, based on 8 May closing prices. See Straits Times Index (STI) Constituents Share Price Performance.
- ST Engineering’s dividend was S$0.15/share last year, and this has been the case for several years. See ST Engineering Dividend History. However, with COVID-19, there is now the risk of a reduction in dividend, especially with the weakness in aerospace.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
- We adjust our estimates and our fair value is lowered to S$3.90.
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2020-05-11
SGX Stock
Analyst Report
3.90
DOWN
4.700
