ST Engineering - RHB Invest 2020-07-30: Look Beyond Near-Term Weakness; Keep BUY


ST Engineering - Look Beyond Near-Term Weakness; Keep BUY

  • Despite downside risks to 2020F profit from slower economic recovery, we remain optimistic of growth in 2021F, which will be aided by normalisation of order deliveries across all segments.
  • Given its record-high orderbook that offers revenue visibility beyond 2020, a well-diversified business model that will mitigate near-term earnings volatility, sustainable dividend payout and below average P/E valuation, we believe ST Engineering could continue to outperform the STI in 2020.
  • Keep BUY and SGD3.90 Target Price, 18% upside with c.4.5% FY20F yield.

ST Engineering wins Smart Mobility contracts.

  • Singapore’s Land Transport Authority awarded SGD146.6m worth of contracts to ST Engineering (SGX:S63) for the provision of the integrated supervisory control system (ISCS) and communications system for the Jurong Region Line. See ST Engineering Announcements.
  • The ISCS, which is the backbone of a rail line's remote supervision and control system, allows the operation control centre, depot control centre and passenger service centre to monitor electrical and mechanical systems as well as civil equipment. The communications system includes digital trunked radio, video surveillance and travel information system on trains. The ISCS and communications system is part of ST Engineering’s Smart City offerings and will contribute to its Electronics earnings.

2020F earnings downgrade still likely, remain optimistic on long-term growth.

  • This year, ST Engineering has seen a 23% downgrade in 2020F earnings estimates. Investors would be waiting to hear management’s views on the 2H20 outlook at its upcoming earnings release. While there exist downside risks to 2020F profit, ST Engineering’s near-term earnings should remain resilient, aided by its well-diversified business portfolio and defence earnings.
  • Over the longer term, ST Engineering’s high order backlog of SGD16.3bn should provide revenue visibility and its strong technological capabilities should support earnings growth.

Sustainable dividends despite lower earnings.

  • Despite our and street expectations of an earnings decline in 2020F, ST Engineering could sustain its DPS of SGD0.15 for 2020F vs that of other large-cap companies (including the banks), which will see lower dividends.
  • Over the last five years, ST Engineering has paid an interim dividend of SGD0.05. We expect a similar interim DPS to be announced on 14 Aug, when ST Engineering announces its 1H20 results. See ST Engineering Dividend History.

Valuation is not pricing in 2021 earnings growth.

Shekhar Jaiswal RHB Securities Research | 2020-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900