ST Engineering - OCBC Investment 2020-08-14: Adapting To A Tougher Environment


ST Engineering - Adapting To A Tougher Environment

  • ST Engineering to receive more than SGD 300m support for whole of 2020 (SG and overseas).
  • But do not expect support beyond this year.
  • Aerospace hit, but seeking to capture opportunities arising from COVID-19.

Resilient performance in 1H20

  • ST Engineering (SGX:S63) reported a 2% rise in revenue and a 4% fall in net profit attributable to shareholders to SGD 257m in 1H20 that was within expectations. The Marine sector revenue performance and acquisitions by the Aerospace and Electronics sectors in 2019 (MRAS in April and Newtec in October) resulted in revenue growth for 1H20 but this was largely offset by the impact of COVID-19 (reduction in customer demand, supply chain challenges, and workforce disruption).
  • Excluding the effects of acquisitions, revenue was 7% lower than 1H19.
  • The bottom-line was impacted by COVID-19 but aided by cost reduction initiatives and government support. Including financial stimulus packages provided by governments in locations where the group’s locally incorporated businesses operate in, the group expects to receive more than SGD 300m in government support for the whole of 2020 (less than half of this received in 1H20), but do not expect such support beyond this year.
  • ST Engineering's FY20 revenue is expected to come in between 5-15% lower vs. FY19.

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’s net profit last year, this would have a knock-on effect on the group. Aerospace saw a 17% fall in net profit to SGD 105m in 1H20, but we expect a weaker performance in 2H20.
  • 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.

Most other segments not as impacted

  • As for the group’s other operations, Electronics accounted for 33% of FY19 net profit while Land Systems contributed 13%. The remaining 9% is from Marine. Electronics saw a 7% rise in net profit in 1H20 while Land Systems had a 17% increase. Marine saw a 19% fall. About a third of the group’s business is defense-related, which is less likely to be impacted by COVID-19.

Alert to opportunities

OCBC Research Team OCBC Investment Research | 2020-08-14
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