• ST Engineering's Marine unit delivered its 3rd consecutive quarter of profit growth on better shipbuilding profit, beating Singapore peers. Earnings visibility is strong.
• Electronics posted its first double-digit PBT growth since FY13 without compromising PBT margin (10%). We see PBT margin sustaining in FY19F.
• Management confident of completing MRAS acquisition by 1Q19. We bake in S$26m of aerospace profit in FY19F, assuming 2H19F MRAS contribution.

Provisions and Impairment Part and Parcel of a Conglomerate

• SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering)'s 4Q18 profit of S$149m slightly beat our S$132m expectation but missed Bloomberg consensus’ S$170m on higher impairment at Land Systems (S$20m), MRAS acquisition costs and divestment loss from disposal of its pilot training school (S$10m).
• Excluding one-offs, FY18 profit would have been S$527m vs. our forecast of S$501m and consensus’ S$543m.
• Given the diversity of ST Engineering, one should not be alarmed of “recurring” one-offs due to rationalisation of portfolios/ investments.

MRAS Critical to Aerospace’s Double-digit Earnings Growth

• Aerospace unit’s FY18 net profit of S$245m (flat y-o-y) reflected S$15m-16m MRAS acquisition cost as well as net divestment gains from the sale of Airbus Helicopters, STAG and pilot training school during the year.
• Upcycle trend in engine maintenance repair remains and management expects to trend industry’s growth of 5-6% p.a.
• Components outlook is slightly challenged by heightened delivery of new generation aircraft such as A320neo and B737 which defer components replacement. PTF programme will support the EMS revenue but the learning curve costs could hamper margins in the short-term. Therefore, completing the MRAS acquisition is critical for aero’s growth. With MRAS, we project 13-26% y-o-y net profit growth for aero in FY19-20F.

Marine Beat Peers, Orders Largely Defence in Nature

• Assuming no cost overrun, we forecast 41% y-o-y growth in FY19F marine profit, backed by strong order book. Revenue recognition for S$750m of firm orders in 2018 should kick in by 1H19F. Most of these contracts are defence or government-related.
• We have conservatively assumed shipbuilding net margin of 2.5% for FY19F (4Q18: 3.1%) and see potential for upside. FY18 ship repair profit rose 21% y-o-y to S$55m, with attractive net margin of 19%.
• Engineering segment should also turn around in FY19F as Ropax charter resumed in 4Q18.

Maintain ADD, Raise Target Price to S$4.08, FY19-20F EPS Up 3%

• Our Target Price is derived on blended valuations. We expect the completion of MRAS acquisition to catalyse its ST Engineering's share price.
• US-China trade war ripple effects are risks to our ADD call.

Source: CGS-CIMB Research - 21 Feb 2019