ST Engineering - UOB Kay Hian 2020-11-19: New Organisational Structure For Global Success


ST Engineering - New Organisational Structure For Global Success

  • ST Engineering guided that 2020 revenue could decline by midway of a 5-15% range. It also guided that local operations have normalised. Orderbook has not declined meaningfully, indicating that its global business has normalised to a large extent.
  • Still, concerns remain on an earnings deficit for 2021 after factoring in some S$300m in JSS grants for 2020.
  • We are positive on ST Engineering’s new organisational structure as it presents a clearer perspective of its engineering capability and solutions.
  • Maintain HOLD. Target price: S$3.65.
  • Suggested entry level: S$3.30-3.40.

ST Engineering's 9M20 Business Update

Revenue likely to decline by mid-point of initial guidance of 5-15% for 2020. This is close to our full-year estimate of an 8.8% yoy decline.

  • ST Engineering (SGX:S63)’s 1H20 revenue grew 1.7% y-o-y, but excluding M&As, it would have declined 7% y-o-y.
  • ST Engineering’s guidance appears to imply that the rate of decline in core revenue might not have shown significant improvement. Nonetheless, the company indicated that demand for the electronics mobility business has improved and that it is on track to deliver 20 electric-vehicle buses to the Land Transport Authority in 2H20.
  • ST Engineering's orderbook as at 9M20 amounted to S$15.8b, down S$0.1b from end-1H20. ST Engineering did not provide net profit numbers. We have estimated 2020 net profit to fall 9% y-o-y, after factoring in S$330m in Job Support Scheme (JSS) grants.

Return to normalcy for marine operations in Singapore, electronics mobility business and defence and government projects.

  • For the aerospace business, ST Engineering indicated that hangar capacity utilisation was at 66% and further improvement was expected in 2021. Given the return to normalcy, we estimate that 2H20’s earnings should show a h-o-h improvement, provided ST Engineering does not make further impairments (1H20: S$24m in impairment on trade receivables)

Looking at cost saving measures and new businesses to offset the reduction in JSS in 2021.

  • Much of the analyst queries centred on the impact to 2021 earnings after the cessation of 2020’s JSS payouts. ST Engineering indicated that half of the shortfall would accrue from cost-saving measures, which would include about S$100m in JSS payouts slated for 2021. In addition, ST Engineering highlighted the focus on new business ventures, including pax-to-freighter (PTF) conversions.
  • ST Engineering had reported earlier that it was expanding its annual A3221 PTF slots from 9 to 23 by 2023, and is also forming a new line for B767 PTF conversions. That aside, ST Engineering is also looking at cyber security for video conferencing and other IT solutions to boost revenue.

New organisational structure for better branding and client interaction.

  • ST Engineering will have two main business segments. The commercial segment will include commercial aircraft maintenance, satellite communications and urban solutions, such as smart city projects. The other segment consists of defence and public security, which will include digital and cyber security solutions and mainstream defence solutions.
  • The new organisational structure would be headed by the CEO, the CFO and two divisional heads.

Positives priced in; prefer to buy on weakness.

  • The key positive is the return to normalcy for the local electronics mobility and defence projects along with works at local marine yards. However, overseas smart city projects might not made much headway, given that borders remain closed.
  • We also believe the aerospace business is unlikely to swiftly recover in 2021, given that airlines are likely to focus on improving load factors rather than aggressively adding capacity. This will lead to a slower recovery for the aircraft maintenance business.
  • Still, for 2021, we estimate ST Engineering will be able to offset 50% of the shortfall from 2020’s JSS, with cost savings and incremental revenue.

Maintain HOLD on ST Engineering

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.65 UP 3.600