SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - Relatively Resilient
- 16% rise in ST Engineering's share price since last report in mid Aug.
- Reorganising business segments.
- ST Engineering's revenue in 2020 to be ~10% lower.
Outperformed broader market since last report
- Since our last BUY-rated report, “ST Engineering - OCBC Investment 2020-08-14: Adapting To A Tougher Environment” in August, ST Engineering's share price has appreciated by ~16% compared to the 7% rise in the Straits Times Index.
- ST Engineering (SGX:S63) has been a beneficiary from the recent news relating to positive developments on the vaccine front – the group’s aerospace segment, for instance, should see some light after the COVID-19 outbreak put immense pressure on the global aviation industry’s profitability and cashflows.
Reorganisation of business segments
- Effective 1 January 2021, ST Engineering will be reorganised as Commercial and Defence & Public Security clusters, replacing the sector-structure of Aerospace, Electronics, Land Systems and Marine. From 2021, ST Engineering’s financial reporting will be based on new operating segments, and will be reflected in its financial results for first half-year ending 30 June 2021.
- The Commercial cluster will fuel ST Engineering’s international growth through areas in Commercial Aerospace, Urban Solutions and Satellite Communications domains, to be known as Global Business Areas (or GBAs) to reflect the group’s desire to build global champions.
- The Defence & Public Security cluster will integrate capabilities to be organised as a single cluster comprising Defence Business Areas or DBAs, namely Digital Systems and Cyber, Land Systems, Marine and Defence Aerospace.
Slightly less than half of net profit from aerospace last year
- As Aerospace accounted for about 47% of ST Engineering’s net profit last year, COVID-19 had a knock-on effect on the group. Aerospace saw a 17% fall in net profit to S$ 105m in 1H20, but still managed to secure new orders of S$2b in 9M20, with S$0.6b in 3Q20.
- Within the aerospace business, maintenance, repair and overhaul (MRO) accounts for one-third of the business. As mentioned in our earlier report, downside pressure would 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.
Revenue in 2020 to be about 10% lower
- ST Engineering won more than S$1.7b new orders in 3Q20, with the same amount expected to be delivered in the remaining months of 2020. Management has guided that for 2020, revenue is expected to be close to the midpoint of 5-15% lower than 2019.
- Looking ahead, ST Engineering is well positioned to benefit from areas like Passenger-to-Freighter conversion (increased demand for cargo transport) and smart city solutions, including safe access control management.
- We tweak our estimates and our fair value rises from S$ 3.90 to S$4.30.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2020-11-19
SGX Stock
Analyst Report
4.30
UP
3.900
