ST Engineering - RHB Invest 2020-12-14: Defensive Earnings Growth Story; Maintain BUY


ST Engineering - Defensive Earnings Growth Story; Maintain BUY

  • ST Engineering's share price should continue outperforming the STI Index, thanks to its business’ defensive nature from high order backlog, relatively resilient earnings, and ability to maintain dividend payments.
  • ST Engineering's recent strong electronics order wins and MRO business’ potential bottoming offer signs of demand recovery in 2021. Gains from cost optimisation efforts should also support earnings recovery.
  • Business reorganisation plans should enable greater focus on future growth areas and support earnings beyond 2021.
  • BUY ST Engineering with S$4.40 target price, 15% upside and ~4% 2021F yield.

Electronics is witnessing demand recovery; MRO business may have bottomed out.

  • In 3Q20, ST Engineering (SGX:S63)’s electronics segment registered its highest ever quarterly order win of S$1.1bn. ST Engineering expects this order win momentum to sustain amidst strong governmental spending on technology infrastructure and continuing urbanisation trend.
  • 3Q20 hangar utilisation for its MRO business stood at c.66%. Given its global business presence and in line with industry aircraft fleet mix, ST Engineering’s MRO business has higher exposure to narrow-body aircraft, which is witnessing better passenger demand due to a swift rebound in domestic air traffic.
  • Plans to expand its passenger-to-freighter conversion business could help in improving hangar utilisation while global air traffic gradually recovers.

Confident of its ability to offset tapering government support in 2021.

  • ST Engineering expects to receive S$300m of government support this year. With the Government extending its support until early 2021, it expects to receive another S$100m next year.
  • ST Engineering remains confident of offsetting the shortfall in next year’s government support with benefits from ongoing cost optimisation initiatives and a gradual recovery in demand for most of its business sectors. We believe there is a likelihood that government support may get extended further next year.

Recently announced business reorganisation is a long-term positive.

  • 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 positively, as it will enable ST Engineering to better channel its resources towards growth areas in Smart City and international business, and make it easier to build synergies across current segments.

Defensive business, sustainable dividends.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 4.400 SAME 4.400