SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - On Track For Recovery
- ST Engineering is seeing good recovery with S$1.5bn new contracts in 1Q21 (mainly defence and public security), raising order book to $15.7bn (Dec: S$15.4bn).
- Timely 50/50 JV with Temasek for freighter PTF/leasing to capture strong demand for freighter aircraft. Estimated equity for ST Engineering: S$30m p.a. for 5 years.
- Cost saving efforts slightly better than expected in 1Q21 vs SS$180m guided FY21F. Reiterate ADD with an unchanged target price of S$4.00.
Stronger q-o-q order wins; cost savings better than expected
- ST Engineering (SGX:S63) secured stronger orders of S$1.5bn-S$610m in Defence and Public security, S$510m in Commercial Aerospace and S$371m in Urban Solutions/Satellite Comms. Order book stood at a record S$15.7bn at end-1Q21 (vs. S$15.4bn at end-Dec).
- Cost saving efforts are ahead of ST Engineering’s expectations. The group earlier guided for cost savings of S$180m in FY21F (to offset the gap of S$250m reduction in government grant). This was driven by initiatives started in 2020, including lower discretionary capex/opex, headcount freeze across the group as well as reduced outsourced labour/contracts.
- We expect benefits from these measures to be sustained in the subsequent quarters.
- Risk: economy lockdown.
Return of MRO work, strong freight market
- Although aerospace is still capped by COVID-19 related aviation challenges, ST Engineering is receiving MRO work from narrow body aircraft, fuelled by strong domestic travel in the US and China. There has also been strong demand for MRO work from freighter companies. This is offset by weaker engine and component MRO. With more A320 aircraft deliveries in 2021, the corresponding nacelle production and floor panel will also increase for ST Engineering.
- ST Engineering said that current MRAS nacelle production stood at 40 units/month and will recover to 43 units/month in 3Q21 and 45 units/month in 4Q21 (pre-COVID-19: ~60 units). ST Engineering’s passengers to freighters (PTF) conversion slots are full till end-2022.
Freighter leasing JV with Temasek
- With the tight capacity in the freighter market, ST Engineering has opportunistically set up an asset management JV (50/50) with Temasek dedicated for freighter leasing. The JV plans to build a portfolio of US$600m in five years and grow the fleet to 25 aircraft. Estimated equity outlay for ST Engineering is ~S$30m p.a. for five years, based on 60/40 equity/debt structure.
- ST Engineering could leverage the low aircraft feedstock prices (-20% to -34% y-o-y) to acquire mid-life passenger aircraft that are grounded due to COVID-19 for PTF conversion or directly acquire readily available freighter aircraft for the leasing fleet. Average leasing tenure ranges from 5-10 years. The longer-term plan is to unlock capital via securitisation.
Focus on smart utilities/infrastructure solutions
- With a failed bid to acquire Cubic Corp, ST Engineering will need to strengthen its smart mobility payment capabilities via in house R&D or partner with others. The urban solutions domain continues to focus on smart utilities/infrastructure.
- We retain our target price for ST Engineering, still based on blended valuations (DCF, 19x CY22F P/E and 4% yield).
- See
- Catalysts: M&As and travel resumption.
LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-05-12
SGX Stock
Analyst Report
4.000
SAME
4.000
