SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - Expanding Presence In P2F Business; BUY
- BUY, S$3.90 Target Price, 14% upside with c.4% yield. We reiterate our positive view on ST Engineering, as we remain optimistic on 2021F earnings growth – aided by the gradual normalisation of order deliveries.
- ST Engineering’s plan to expand P2F capacity should be a long-term positive for Aerospace. Our call is supported by its two years of revenue visibility, relatively resilient 2020 earnings, ability to maintain absolute DPS payments in 2020, and in-line historical P/E which does not factor in expectations of strong profit growth in 2021.
Expanding passenger-to-freighter (P2F) business.
- ST Engineering (SGX:S63)’s Aerosapce business has confirmed plans to increase Airbus A321 passenger-to-freighter (P2F) conversion capability, from nine to 25 each year by 2023. With the recent rise in demand for air cargo capacity – as a result of the COVID-19 pandemic – this increase in capacity should aid the growth of Aerospace turnover, which comprised c.45% of total revenue in 2019.
- News reports suggest that, currently, all nine slots for P2F conversions in 2021 are full. It is likely that the early retiring of passenger aircraft – as airlines rightsize their fleets – will make more feedstock available in the coming years.
- Airbus’ A321 P2F conversions are currently done in Singapore and at its Elbe Flugzeugwerke (EFW) JV facility in Germany. To expand the capacity, ST Engineering’s Guangzhou and US units will be equipped to handle A321 P2F operations. We remain positive on the growth in ST Engineering’s Aerospace business beyond 2021.
Diversified business model offers relative defensibility to COVID-19.
- With its business spread across four segments (Aerospace, Electronics, Land Systems and Marine) and across geographies, ST Engineering has a well-diversified portfolio – ensuring resilient earnings through business cycles.
- We believe earnings from defense-related business, which accounted for one-third of 1H20 earnings, and cost support from the extension of the Jobs Support Scheme (JSS) to Mar 2021 should ensure that 2020 earnings remain relatively resilient. Moreover, its orderbook of S$15.9bn offers two years of revenue visibility.
Sustainable dividends for 2020 despite weak earnings.
- We maintain that ST Engineering will likely maintain an unchanged DPS of 15 cents from 2019, for 2020F as well. This is in contrast to other large-cap companies in Singapore, which should see lower dividends in 2020.
- For 1H20, ST Engineering had maintained its 5 cents of interim dividend payment, and has sufficient retained earnings to sustain the final dividends, as well.
- 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 risks: Slower recovery in delivery of orders, lower contributions from new acquisition Singapore’s Smart Nation initiative.
Shekhar Jaiswal
RHB Securities Research
|
https://www.rhbinvest.com.sg/
2020-09-21
SGX Stock
Analyst Report
3.900
SAME
3.900
