ST Engineering Takeaway From Analyst Briefing - CGS-CIMB Research 2020-05-15: Job Support Scheme Is Significant Help

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SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering Takeaway From Analyst Briefing - Job Support Scheme Is Significant Help

• We estimate that ST Engineering (SGX:S63) will receive c.S$150m in job support scheme (JSS) assistance as management said more than S$100m will be accrued in FY20.
• We have assumed a 20% y-o-y fall in aerospace revenue in FY20F. We think this could be in line with ST Engineering’s expectations of a 60% capacity reduction.
• The 5-15% revenue decline guidance for FY20 assumes Covid-19 impact will persist to end-2020 with two-thirds of the impact due to customer demand.

Earnings fall less than revenue thanks to job support scheme (JSS)

• Management said that job support scheme (JSS) assistance from the government is “not insignificant” and its 14,000 staff in Singapore are qualified for the 25% government job support scheme for 9 months and 75% for the months of Apr-May.
• Based on the IRAS guidance, we estimate about S$150m of JSS to be accrued from Apr 20, cushioning the 5-15% y-o-y revenue decline guidance for FY20F. Two-thirds of the decline is due to lower customer demand and a third from supply and workforce disruption. The guidance also assumes
  • two months circuit breaker in Apr and May, with no further extension, and
  • Covid-19 effects lasting till end-2020.
• Cost savings measures are being looked at more closely, especially in overseas aerospace units, in line with the lower work volume.

Aerospace capacity to fall to 60%; PTF to stabilise by early-2021

• See previous update: ST Engineering - CGS-CIMB Research 2020-05-15: Aerospace & Electronics Hit By Covid-19.
• Average capacity utilisation for AMM and CERO were about 80-85% in 1Q20 and management expects this to fall to 60% in subsequent quarters. There has been no cancellation of MRO (maintenance, repair and overhaul) contracts but active negotiations are ongoing on rescheduling, depending on timeline of borders reopening.
• There have been some relaxations in domestic travel in Korea, China and US. Industry expects 2-3 years of U-shaped recovery, but management believes ST Engineering is less battered due to
  1. its defence segment,
  2. having both original equipment and after market exposure,
  3. its broad base of passengers and air cargo customers, and
  4. combination of maintenance and passenger to freighter (PTF).
• The supply chain for its PTF programme has been affected and the group is looking for alternative sources and expects stablisation by early-2021. ST Engineering is also watching closely the financial strength of airlines but did not reveal any signs of worry. MRAS’s production of A320neo nacelle is cut to 40 units/month, from 60/month, in line with Airbus’s guidance.
• Note that it used to produce about 33 units of nacelles (both new and mature programme) in 2017-18 prior ST Engineering’s acquisition and generated c. S$33m in net profit in 1H18.

Smart City target under review

• Management said the company’s electronics business has been more badly affected in the near-term than aerospace, in particular the satellite & communications business (iDirect). The segment is related to aviation, cruise and live sports events, which may see weaker demand for routers and equipment.
• The travel bans regionally have also had a relatively larger impact on the division. Therefore the S$2bn Smart City target by 2022 (mainly led by the electronics division) needs to be reviewed.
• During GFC, electronics net profit dropped by 23% in FY08 and recovered by 33% in FY09. We assume 7%/19% y-o-y declines in revenue/profit for the electronics business in FY20F.

Marine somewhat defensive but slightly affected by weak oil prices

• Marine had some support from the defence business as the US Navy exercised the 4th berthing barge contract (US$40m). The rig repair yard in US focuses on servicing the Gulf of Mexico customers that have ongoing charters.
• In Singapore, a large part of its foreign workers are still in lockdown and it is waiting for the lifting of government restrictions over the next few weeks. Management expects repair activities in Singapore and US to return to normal in the next few months. A portion of the work relies on oil and gas; hence low oil prices will have some impact on Singapore repair. We have assumed a 10% y-o-y decline in shipbuilding and ship repair revenue for FY20F.

Land Systems pulls its weight, maintain ADD

• There is minimal supply chain disruption in land systems as components were stocked up in 2019 ahead of production ramp-up. Delivery schedule for Hunter Armoured Fighting Vehicle phase 1 is on track and full production by mid-2020, lasting 2-3 years. Thereafter, phase 2 will take place.
• The Electronic Vehicle delivery for Land Transport Authority is deferred slightly to end-2020.
• See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
• Our Target Price (blended valuations) is cut to S$3.65 to account for lower growth in electronics.
• Catalyst/risk: faster recovery/prolonged Covid-19.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-15

SGX Stock Analyst Report ADD MAINTAIN ADD 3.65 DOWN 3.860