SINGAPORE TECH ENGINEERING LTD (SGX:S63)
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
- Overall, we forecast 1H20F net profit to drop 5% to S$254m, and ST Engineering to fare relatively better than peers in conglomerate/ industrial sector that see significant impairment. We now expect FY20F revenue to decline 17% to S$6.5bn vs. ST Engineering’s guidance of 5-15% decline.
- We cut FY20-21F EPS by 8-9% to reflect lower margins for aerospace, and lower revenue in electronics and marine. Our DPS declines to S$0.135 (84% payout), still a decent 4% yield.
- We believe ST Engineering’s diversified business model with defence and smart city content sets it apart from peers. ST Engineering trades at 0.5 s.d. 10-year mean.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
- Key risk: customer delinquencies.
- Catalyst: defence contracts win.
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-08-07
SGX Stock
Analyst Report
3.46
DOWN
3.650
