ST Engineering - CGS-CIMB Research 2021-08-12: Order Book Stronger Than Pre-COVID Days

SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - Order Book Stronger Than Pre-COVID Days

ST Engineering received an S$125m grant in 1H21, and expects more grants in 2H21 (we estimate S$75m), mainly for aerospace overseas operations.
Revenue growth is more apparent in urban solutions & satellite communications (12% y-o-y) and defence & public security (9% y-o-y) in 1H21.
Commercial aerospace revenue is on track, up 7% h-o-h driven by domestic travel in the US, with airframe hangar utilisation exceeding 80% in 1H21.

Order book exceeds pre-COVID (7% q-o-q, 6% y-o-y) at S$16.8bn with S$1.82bn of orders (excluding confidential ones) in 2Q21. ADD, higher target price of S$4.54.

ST Engineering (SGX:S63) declared unchanged y-o-y interim dividend of S$0.05 for FY21. Its 1H21 net profit of S$296.1m (+12% h-o-h, +15% y-o-y) is broadly in line (53% of FY21F) with our forecast and on the higher end of consensus (54% of FY21F). This is helped by an S$11.3m one-off gain from proceeds of liquidated specialty vehicle as well as higher-than-expected grant (S$125m in 1H21). Accordingly, management guided for additional S$100m of grants to be received in 2021.
It previously expected an S$250m y-o-y reduction in grant in 2021 but now expects an S$150m reduction. The positive surprise in grant is largely from aerospace overseas operations.
We expect ST Engineering to receive another S$75m in 2H21 and adjust our EPS by 8% for FY21F. Order win for 2Q21 of S$1.82bn excludes contracts that are commercially sensitive which we estimate to be in the region of S$300m-600m.

1H21 revenue down 10% y-o-y for CA as prior year included a quarter of pre-COVID performance. Airframe maintenance work grew from domestic travelling in the US, offset by weaker component (to recover in 2022). Commercial airframe hangar utilisation was more than 80% while average aerospace utilisation stood at ~80%. Passenger to Freighter (P2F) conversion will induct 30 aircraft in FY21F and 55 in FY22F.
On a h-o-h basis, commercial aerospace’ revenue had grown by 7%, a satisfactory recovery pace, in our view.
During the quarter, CA also clinched stronger q-o-q orders of S$874m, including customised composite panels from international airlines as well as composite floor panels from an European train manufacturer (read: diversification of product).

USS led the group’s revenue recovery from smart mobility and satellite comms (iDirect and Newtec) in the aviation and maritime sectors affected by COVID in 2020. ST Engineering shared that the share of losses (S$4.9m) in USS related to its SPTel, a 51:49 JV with SP Group to build born-in-the cloud network and software-defined services. Gestation may take a few years but this should complement Singapore’s smart nation connectivity plan.

Revenue was up 9% y-o-y to S$1.99bn in 1H21 mainly driven by defence portion especially from Land Systems (+14% y-o-y to S$717m). In this division, it also included digital systems & cyber security segment, in which we saw steady y-o-y growth (+9% to S$719m). Land systems would be the second largest revenue contributor in DPS with 14% y-o-y increase to S$717m with the ongoing delivery of Hunter Armoured Fighter Vehicles.

We like ST Engineering’s continuous efforts to reshape its business to cope with changes. Our target price is on blended DCF, 20.7x CY22F P/E and 4% dividend yield.
See
ST Engineering overall key downside risks: project cost overruns, new pandemic.
Re-rating catalysts: investor day and communication of new ROE targets, faster-than-expected recovery in aviation industry.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-12

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