ST Engineering - RHB Invest 2020-11-20: Strong Order Book, Reorganisation Is Positive; BUY


ST Engineering - Strong Order Book, Reorganisation Is Positive; BUY

  • Despite the weak business environment, ST Engineering notched up strong order wins in 3Q20. Management remains committed to working towards cost optimisation. ST Engineering's recent plans to reorganise its businesses to focus on key growth areas, is a positive.
  • We continue to like ST Engineering for its defensive earnings quality and ability to sustain dividend payments. We expect strong earnings growth in 2021F, which ST Engineering's share price yet to fully factor in.
  • Reiterate BUY with higher S$4.40 target price from S$3.90, 13% upside and c.4% yield.

Strong order wins, robust orderbook.

  • ST Engineering (SGX:S63)’s S$15.8bn outstanding order book offers over two years of revenue visibility. In 3Q20, ST Engineering won S$1.7bn worth of new orders, with electronics securing a S$1.1bn historical record win – its highest ever quarterly order win.
  • ST Engineering noted that it did not have to compromise on margins to register such strong order wins. While order wins for aerospace remained sluggish, ST Engineering believes the MRO business may have bottomed, and could improve next year.

Confident of ability to offset tapering government support.

  • ST Engineering expects to receive S$300m of government support this year. With the Government extending its support, the company expects to receive another S$100m next year.
  • While government support is expected to taper off next year, ST Engineering remains confident of offsetting the shortfall in 2021, with benefits from ongoing cost optimisation initiatives, and a gradual recovery in demand for most of its business sectors.

Reorganisation enables better focus on growth areas.

  • Effective 1 Jan 2021, ST Engineering will reorganise its businesses into two growth-focused segments – commercial, and defence & public security. These will replace the current aerospace, electronics, land systems and marine segments. We view this as a positive, as it will enable ST Engineering to better channel its resources towards growth areas in Smart City and international businesses, and make it easier to optimise synergies across the current business segments.

Dividends should come through.

  • ST Engineering mentioned that business reorganisation and realignment of focus on growth areas will not impact its dividend policy. We maintain that ST Engineering will likely keep its 15 cents dividend from 2019, for 2020F as well.

Roll forward our valuation to 2021 earnings

Shekhar Jaiswal RHB Securities Research | 2020-11-20
SGX Stock Analyst Report BUY MAINTAIN BUY 4.40 UP 3.900