ST Engineering - UOB Kay Hian 2021-08-13: 1H21 Ex-Grants Net Profit Grew 19.5%, But 2H21 Likely To Be More Challenging

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SINGAPORE TECH ENGINEERING LTD (SGX:S63)

ST Engineering - 1H21 Ex-Grants Net Profit Grew 19.5%, But 2H21 Likely To Be More Challenging

• ST Engineering (SGX:S63)'s 1H21 earnings only reflected an S$11m reduction in government grants. We estimate that grants could decline greater than S$150m in 2H21. While ST Engineering aims to offset that by further cost savings and new businesses, we estimate 2H21 earnings could drop 30% h-o-h.
• We are encouraged by ST Engineering’s continued growth in orderbook, but valuation multiples are unlikely to expand further. Downgrade to HOLD. Target Price: S$4.25.

Ex-grants, ST Engineering' 1H21 net profit grew an impressive 19.5% y-o-y.

• ST Engineering's 1H21 earnings were proportionately higher than our and street’s full-year estimates of S$494m and S$544m respectively, due to a minimal S$11m reduction in government grants during 1H21.
• ST Engineering guided that the reduction in grants will be back loaded into 2H21. ST Engineering also received an additional S$100m in government grants but guided that some of that would be reinvested into the business and to upskill workers. ST Engineering managed to grow revenue by S$79m with bottom-line rising by S$50m, excluding the impact of lower grants.
• ST Engineering also introduced new segments, consisting of
  • commercial aerospace,
  • urban solutions and satcom (USS) and
  • defence and public security (DPS).
• ST Engineering declared S$0.05 in interim dividend, unchanged from 1H20.

ST Engineering's 1H21 Highlights

• 1H21 net profit improvement aided by expected to be more resilient. The commercial aerospace business improved 7% h-o-h, but recovery was indicated that there was an increased demand for cyber security for critical infrastructure.

STOCK IMPACT

• 2H21 earnings likely to decline significantly h-o-h. Excluding the impact of earnings for 2H21.

EARNINGS REVISION & RISK

• We raise our 2021 net profit estimate for ST Engineering by 2% but we lower our 2022 earnings estimate by 4%, factoring in slower growth from the commercial aviation segment.

VALUATION & RECOMMENDATION

• Downgrade to HOLD with a target price of S$4.25 (previously S$4.26). We value ST Engineering on value, ST Engineering will be trading at 25.2x 2022’s estimated earnings.
• See
  • ST Engineering's Share Price,
  • ST Engineering's Target Price,
  • ST Engineering's Analyst Reports,
  • ST Engineering's Dividend History,
  • ST Engineering's Announcements,
  • ST Engineering's Latest News.

SHARE PRICE CATALYST

• Opening up of borders.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-13

SGX Stock Analyst Report HOLD DOWNGRADE BUY 4.25 DOWN 4.260