• ST Engineering’s 2Q18 core net profit of around S$128m in line with our estimates, well on track for earnings growth in FY18. 
• Orderbook remains near peak level of S$13.4bn. 
• Early redemption of bond due in 2019 should result in interest savings, and boost PBT margins. 
• Trade war concerns not material at this point. 

BUY on Multiple Re-rating Drivers Ahead

ST Engineering (STE) remains a good investment opportunity for the long term. 2Q18 results did not throw up any surprises, with net profit up 10% y-o-y and the group remains on track to resume earnings growth trajectory in FY18/19. 

We like STE for a combination of factors: 

1. improved visibility from STE’s target to more than double smart city revenues by 2022 and grow other segment revenues at 2-3x the global GDP growth rate;
2. rebound in Aerospace segment revenues, driven by recovery in engine maintenance, repair and overhaul (MRO) demand and in the longer-term, sizeable contribution from Airbus Passenger to Freighter (P2F) programmes currently in ramp-up phase;
3. remaining in the hunt for potential large contract awards in the US in future, ranging from postal service trucks to army tanks, and
4. lower interest expenses and higher ROIC (return on invested capital) following early redemption of Notes due 2019.

Source: DBS Research - 10 Aug 2018