• 11.4% YoY rise in 1Q net profit
• S$14.1b order book
• Good stock performance YTD

Healthy set of 1Q19 results

ST Engineering (STE) delivered a 5.1% YoY rise in revenue to S$1.7b and an 11.4% increase in net profit to S$131.1m in 1Q19, such that the latter accounted for 23% of and 22% of ours and the street’s full year forecast, respectively. The top-line growth was driven by a 34% increase in revenue from Land Systems to S$377m in 1Q19, as well as a 4% growth in Aerospace revenue to S$622m.

In terms of net profit, Marine saw the largest percentage increase at 38% for the quarter to S$12.0m, boosted by improved U.S. shipbuilding performance. This was followed by Electronics with an 8% expansion to S$43.4m and Aerospace with 6% growth to S$62.7m. Land Systems saw a 3% YoY fall to S$15.2m with the absence of favourable tax finalization adjustment.

Visibility for at least 78% of FY19 revenue forecast

STE has had a good start to the year in terms of contract wins, which have increased its order book to a high of S$14.1b as at end Mar. About S$4.2b of this is to be delivered in 9M19. The group has also completed the acquisition of MRA Systems and is now focused on integrating the business with the Aerospace segment. As for its Newtec acquisition, this is expected to be completed in 2H19, and when combined with the existing satellite communications businesses, this should further enhance STE’s value proposition for its Smart City initiatives.

Better traction in Smart City and improvement in Marine

YTD, STE’s stock is up 12%, outperforming the STI by about 7%, based on 15 May’s closing prices. Potential catalysts going forward include the US Postal Service’s tender for next-gen electric trucks, as well as the exercising of options for two polar security cutters by the US Coast Guard.

We expect further growth in order book over the longer term with better traction in Smart City solutions and export of defence solutions. We tweak our assumptions and rolling forward our valuations, our fair value estimate is raised from S$4.07 to S$4.22. Maintain BUY.

Source: OCBC Research - 16 May 2019