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ST Engineering - 2Q18: Mounting up its wings

Shared By Stock Fanatic on Monday, August 13, 2018 | 13.8.18

■ STE is a long-term stock to keep. Post its briefing, we are slightly more positive and see its respective divisions on track for steady growth via new investments/products.

■ 2Q18 net profit of S$117m missed our S$130m forecast due to one-off interest for early redemption of US$500m bond and weaker-than-expected Miltope performance.

■ Aerospace was the star with 26% yoy growth in 2Q profit, lifted by S$9m of divestment gain and sustainable upcycle of stronger repair for CFM engines.

■ Electronics is milking the smart nation, cyber security and urbanisation trend, with a 20% yoy growth in profit. Aero and Electronics made up >80% of STE's 2Q profit.

DPS of S$0.05 (flat yoy) was declared. Maintain Add and S$3.80 TP. Read More

Net savings from early bond redemption
1H18 net profit of S$235m at 42% of our FY18 forecast. STE incurred S$15m of one-off interest costs to redeem US$500m of bond (4.8% due 2019). Correspondingly, STE also unwound some funds under management (cross currency swop), resulting in net interest savings of c.1%, c.S$7m p.a. Subsidiary Miltope US continued to post single-digit loss with projects delayed into 2H18/1H19. STE has net cash of S$148m at end-Jun. We think it could gradually adopt a more aggressive capital management (gear up) to fund growth.

Aerospace: hangars full, adding capacity (2Q net profit: S$67m)
STE's hangars in China, the US and Singapore are full; it is expanding capacity in the US and Germany. Component/engine repair and overhaul (CERO) profit surged 200% yoy to S$22m, thanks to stronger engine repair with heavier scope of work (higher value and margin). There were also opportunistic engine sales in 2Q. Aircraft maintenance & modification (AMM) profit rose 21% yoy to S$24m but included gains from divestment of Airbus Hellicopter, excluding which profit declined yoy to S$15m due to a deferral of VIP conversion job. Gradual global fleet growth and upcycle in engine maintenance repair & overhaul (MRO) are in Aero’s favour.

Electronics harvesting fruit of strong orders (net profit: S$47m)
Electronics secured a record S$764m of jobs in 2Q, including rail electronics solutions, smart street light, cybersecurity solutions and satellite communication products for the Cloud. LSG had two consecutive strong quarters, with 1H18 net margin at c.12% (1H17: 7%). We think this was due to the “S” curve recognition of projects. CSG profit benefitted from stronger satellite product sales at iDirect. Given the synergy between Electronics and Land Systems, STE could double its smart city revenue to S$2bn by 2022F.

Marine hit by off-charter
Marine’s 2Q net profit of S$8m (-13% qoq) was affected by the Engineering division's S$2m loss due to off-charter and overhaul costs for its Ropax vessel in Poland. The vessel has started its charter in Aug 18, hence losses should narrow in 3Q18F. We expect a turnaround in 4Q18F as ST Marine starts construction works for Jurong Island Desalination Project (JSIP). Shipbuilding losses narrowed qoq to S$2m (1Q17: -S$6m) with the first Conro vessel delivered in Jul. The second unit is due for delivery in Oct 18. Given the lack of commercial work in the US, we expect shipbuilding to remain slightly loss-making in FY19F. Upside could come from winning defence naval contracts.

Technical Analysis
Daily Chart
YTD order win S$2.4bn, maintain Add and TP of S$3.80
We expect STE to secure c.S$4.5bn-4.8bn of orders, driven by Electronics and Aero. Our EPS is cut by 4% for FY18F to reflect 2Q18 and up 1-6% for FY19-20F on stronger marine. Our TP is unchanged, still based on SOP. Surprise defence contracts and sizeable earnings-accretive M&As are catalysts. Key risks to our call are the multiplier effects of trade war on the global economy.

Source : CGSCIMB Research
(Read Report)

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Posted on Monday, August 13, 2018 | 13.8.18
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