2Q18 Core Profit Better Than We Expected

• Against a backdrop of trade tensions and rising oil, raw material costs, ST Engineering delivered better than expected 2Q18 core PATMI growth of 20% y-o-y, 8% q-o-q. Moreover management indicate some business units could see a better 2H with timing of some contracts pushed back by a few months.
• We remain positive on secular growth in aerospace airframe maintenance and PTF and increasing investment by countries in Smart City solutions.
• Maintain BUY, with DCF based Target Price of SGD4.15 (WACC 8.1%, TG 2%).

Growth Driven by Better Margin Work Mix

ST Engineering's 2Q18 revenues were slightly down y-o-y and flat q-o-q largely from the effect of changes made in revenue recognition policy last year. EBITDA grew 11% y-o-y, 13% q-o-q from a better mix of higher margin work in Electronics, Land Systems segments while Marine experienced a turnaround to the black from provisions taken on US shipbuilding contracts last year.

Group pre-tax margin in 2Q18 improved 100bps y-o-y to 9% (flat y-o-y for 1H18).

Source: Maybank Kim Eng Research - 08 Aug 2018