ST Engineering - UOB Kay Hian 2020-08-17: 1H20 Earnings In Line, HOLD For A 4% Dividend Yield


ST Engineering - 1H20 Earnings In Line, HOLD For A 4% Dividend Yield

  • The fact that ST Engineering did not cut interim dividend is a key positive. We have assumed that final dividend will amount to 9 S cents, which will provide a 4.1% dividend yield based on our target price. That said, we now expect 2021’s earnings to decline 24% y-o-y due to the removal of government grants and a more gradual recovery for the MRO business.
  • We maintain our HOLD rating on ST Engineering but have lowered our target price to S$3.40.
  • Suggested entry level: S$3.15.

ST Engineering's 1H20 Results

Earnings broadly in line but 2H20’s earnings could still vary significantly h-o-h.

  • ST Engineering (SGX:S63)'s 1H20’s revenue growth was driven by a full period of revenue recognition from M&A. Excluding that, 1H20’s revenue would have declined by 7% y-o-y, with the aerospace and electronics divisions’ revenue declining by 17% y-o-y and 7% y-o-y respectively. ST Engineering continued to guide for a 5-15% decline in revenue for 2020.
  • ST Engineering guided that collectively, the Job Support Scheme (JSS) and other grants would lead to > S$300m in additional income for the full year, but highlighted that it had recognised less than half of the total in 1H20, while for JSS, it had recognised 50% in 1H20.
  • Assuming that ST Engineering recognised S$150m for the period, net profit would have declined by 60% y-o-y, though ST Engineering indicated that such calculations would not be truly indicative as JSS was aimed at preserving jobs.
  • ST Engineering maintained its dividend payout of 5 S cents and also hinted that its strong cash reserves should support future payout.
  • ST Engineering also recognised S$24m in impairment charges, with half of that made for trade receivables and contract assets.

Strong cash generation and orderbook growth.

  • The 140% y-o-y growth in OCF was mainly due to a reduction in trade receivables and higher contract liabilities.
  • Orderbook improved by 11% to S$15.9b as the aerospace and electronics segments secured S$2.7b worth of contracts in 1H20. The group expects to deliver S$3.2b from the orderbook in the remaining months of 2020, though this is a 16% y-o-y decline from S$3.8b for the same period in 2019.

Marine division recorded the steepest decline in PBT

  • Marine division recorded the steepest decline in PBT due to S$10.6m in losses for the shipbuilding segment. ST Engineering attributed the cost overruns to two of its berthing barge contracts for the US navy. ST Engineering also stated that the contracts were bid for at the tail end of the cycle in 2018 on low expected margins.

Land systems revenue fell 4%

  • Land systems revenue fell 4% on the back of weak speciality vehicle sales in the US and lower MAN bus sales in Singapore. However, the 17% y-o-y rise in PBT was supported by JSS and lower opex.

Long road ahead for the aerospace division.

  • A full recovery could only come in by 2024. Both Airbus and Boeing have cut production by at least a third and numerous airlines have ceased operations. ST Engineering highlighted that aircraft maintenance (MRO) spent for 2020 could decline by at least 45%, based on Oliver Wyman’s estimates.
  • ST Engineering is likely to see substantially lower revenue erosion due to its leadership position in Passenger to Freighter (PTF) conversion. ST Engineering highlighted that a shortfall in bellyhold capacity has led to increased queries on PTF work, especially given low fleet stock prices.

Million-dollar question: How much can ST Engineering buffer the c.S$300m shortfall in JSS and other grants in 2021?

  • The actual size of the one-off grants inclusive of JSS was higher than expectation and could amount to about 60% of 2020’s estimated earnings. ST Engineering had stated that new growth opportunities, particularly PTF conversions, intensified new innovative efforts and further cost rationalisation could offset part of the shortfall.
  • ST Engineering also highlighted that it has formed a JV in Israel to market anti-ship missiles. Implicit within our forecast is that ST Engineering will be able to recoup about 60% of the JSS and other grants via cost savings and increased revenue.

ST Engineering - Valuation & Recommendations

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.40 DOWN 3.500