ST Engineering - DBS Research 2021-02-22: Sound Recovery Prospects


ST Engineering - Sound Recovery Prospects

  • ST Engineering's 4Q20 net profit met our expectations as higher government grants offset soft operating performance and higher asset impairments.
  • Final dividend of S$0.10 per share declared; total annual dividends maintained at S$0.15 level.
  • Commendable level of new order wins in FY20; order backlog remains healthy at S$15.4bn (2.2x sales).
  • Maintain BUY on ST Engineering with unchanged target price of S$4.20.

4Q20 results in line with expectations; brighter days ahead

  • ST Engineering (SGX:S63)'s Net profit of S$264.4m (-14.3% y-o-y, +2.7% h-o-h) in 2H20 largely in line with expectations, bringing FY20 net profit to S$521.8m, accounting for 100%/98.6% of consensus/DBS full-year estimates respectively. ST Engineering received around S$200m of financial support in 2H20 (up from ~S$150m in 1H20), which helped to offset
    1. sequential deterioration in its aerospace and shipbuilding segments,
    2. additional asset (intangible & property, plant and equipment) and trade receivable/contract assets impairments amounting to ~S$45.6m and S$13.9m respectively, and
    3. FX losses of around S$15.9m during the period.
  • Revenue was fairly stable at S$3,586m (-17.7%, +0.4% h-o-h) in 2H20, as an acceleration in projection execution in the electronics segment, faster delivery of the Hunter AFair Value and stronger defence sales in its land systems segment, helped mitigate weakness in its aerospace segment (revenues down 37.6% y-o-y and 15.4% h-o-h).
  • Aerospace was impacted by considerably lower level of activity in its engine and components workshops and OEM businesses (MRAS and EFW). As a result of lower commercial aircraft MRO activity, defence sales as a proportion of total sales climbed to ~36.1% in FY20 from ~33.3% in FY19.

Group PBT margin dragged by aerospace and marine divisions; core PBT margin under pressure.

  • ST Engineering’s PBT margin narrowed to 6.9% in 2H20, down from 8.0% in 1H20 and 8.4% in 2H19. This was primarily due to higher impairment losses at the aerospace division during the period, and continued cost overruns in the shipbuilding business. Excluding the impact of government grants and impairments, ST Engineering’s core PBT margin would have been down to 3.8% in 2H20, from 4.8% in 1H20.

Order backlog shrank slightly to S$15.4bn as at Dec-20.

  • Despite contract cancellations and deferments of around S$1.0bn (majority in the aerospace division), the group ended the year with a robust orderbook after securing about S$5.7bn worth of aerospace and electronics contracts during the year. The management shared that ST Engineering is slated to deliver S$5.3bn from its orderbook in 2021, representing ~70% of our full-year projection.

Final dividend in line with expectations; no change to dividend projections.

  • ST Engineering declared a final dividend of 10.0cents/share, bringing total dividends in FY20 to 15.0cents/share, on-par with the previous years and in line with expectations. We believe that until the group’s recovery is on firmer footing, ST Engineering will maintain its dividend payout at the current level, which implies a forward dividend yield of ~4.0%.

Management indicated for net profits to be flattish in FY21F.

  • ST Engineering expects the gap in government support of around S$250m in FY21F to be offset by cost savings (S$180m) on manpower costs and improved productivity and partial business recovery (S$70m). We were surprised that the guidance was unchanged even as the Singapore government announced that they would extend 50% wage support for the aerospace sector for an additional six months in Budget 2021. This could simply be a timing issue, given that ST Engineering received a total of S$350m in government grants in FY20 (vs. our initial estimate of S$300m in FY20).

Aerospace division has bottomed out, but recovery will be gradual.

  • As highlighted in our previous reports, we believe that the worst is over in the aerospace sector and are still optimistic on a revival in air travel activity towards the end of 2021 despite the proliferation of multiple COVID-19 variants throughout the world. However, a full recovery is likely to be elusive until late 2022 as
    • airlines focus on cash preservation to reduce cash burn in the short-term,
    • the retirement of older aircraft that accounted for a significant portion of global MRO spending gains momentum,
    • the wide availability of green-time engines from grounded/retired aircraft enables airlines to defer visits to the engine shops, and
    • aircraft production by Airbus takes time to revert to pre-crisis levels.
  • Nevertheless, a rapid ramp-up in Passenger-to-Freighter (P2F) conversions in 2021 (from 10 aircraft in FY20 to 30 in FY21F and 40 in FY22F), stronger demand for cabin modifications to facilitate safer air travel over the next few years, coupled with its cost-savings initiatives and the extension of wage support into 2021 will help moderate softer activity levels across its other businesses in the aerospace segment.
  • Overall, we are cutting earnings estimates for ST Engineering by 11% and 8% respectively in FY21/22 to reflect the slow recovery in Aerospace business.

Prospects for smart-city solutions continue to be positive.

  • We expect demand for smart city solutions to be robust over the next few years, with
    1. the pandemic accelerating digitalisation trends across the world,
    2. governments increasing their budgets on integrated mobility solutions, and
    3. both governments and corporates spending more on cybersecurity solutions to enable employees to work seamlessly and securely from any location.

Maintain BUY with unchanged target price of S$4.20.

Suvro SARKAR DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2021-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 4.200 SAME 4.200