ST Engineering 1H20 Preview - CGS-CIMB Research 2020-08-07: COVID Hit, But Better Off Than Peers


ST Engineering 1H20 Preview - COVID Hit, But Better Off Than Peers

  • We build in sharper revenue decline and margin compression for ST Engineering's aerospace, marine and electronics to reflect a more severe impact from COVID-19. Land systems is the only sector that weighs in earnings growth from defence projects delivery.
  • We estimate c.S$150m from Jobs Support Scheme (JSS) to lift ST Engineering's FY20F profit.
  • FY20-21F EPS cut by 8-9%. With its diversification, ST Engineering should fare better than its industrial/ conglomerate peers.
  • Reiterate ADD with a lower S$3.46 Target Price.

Aerospace MRO could be harder hit but JSS helps

  • Intermittent lockdowns and recurrence of COVID-19 infection waves globally could result in a sharper decline in demand for aircraft maintenance, repair and overhaul (MRO). As air travel was at near standstill globally in 2Q20, ST Engineering (SGX:S63)'s aerospace arm likely saw a plunge in MRO services. We expect 50-60% y-o-y decline in 1H20F aircraft maintenance (AMM) and component & engine profits.
  • Passenger-to-freighter (PTF) conversion and MRAS production could be relatively more resilient; we project a narrower y-o-y decline of 30% in 1H20F profits.
  • All in, we see declines of 27% in revenue and 22% in profit for aerospace in FY20F. This takes into account the benefits of the recategorisation of aerospace MRO operators to first tier with 75% Jobs Support Scheme (JSS) wage co-funding (previously 25%).
  • Aerospace’s medium-term outlook is tough given the uncertainty on how airlines will manage their maintenance and impact on MRO business.

Land is the bright spot, elect and marine delayed execution

  • All hopes are on ST Engineering's land systems with the delivery of Hunter Armoured Fighting Vehicle reaching full production capacity by mid-2020. This should cushion the potential slower sale in munition and weapons and service trading. We project 56% y-o-y growth for land systems' 1H20F net profit.
  • We expect electronics to be affected by the deferred execution of overseas projects due to border closures. Locally, the gradual easing of circuit breaker to phase 2 could result in a slow pick-up in activities. Sale of satellite communications products by iDirect serving the marine and aviation sectors will be affected, in addition to integration costs for Newtec and Glowlink (c.S$20m for FY20F). We project 23% y-o-y decline in 1H20F electronics profits.
  • Marine’s yard activities and engineering projects could be affected by shortage of workers in Singapore although its US yards could provide some buffer. We see a 23% y-o-y decline in 1H20F marine profit.

ST Engineering's 1H20 results on 14 Aug; maintain ADD, but lower Target Price to S$3.46

LIM Siew Khee CGS-CIMB Research | 2020-08-07
SGX Stock Analyst Report ADD MAINTAIN ADD 3.46 DOWN 3.650