Growth Strategy on Track; Maintain BUY

• 3Q19 was a strong quarter with group revenue posting its highest y-o-y growth in over a decade. Excluding one-off provision and inventory impairment, core PATMI rose 33% y-o-y/25% q-o-q with 9M19 accounting for 79% of our FY19 forecast.
• ST ENGINEERING (SGX:S63)’s various growth initiatives through M&A, efficiency improvements and portfolio rationalisation appear to be on track.
• Our FY19-21E forecasts, DCF-based (7.9% WACC; 2% TGR) SGD4.50 Target Price and BUY rating are unchanged. See ST Engineering Share Price; ST Engineering Target Price.

Revenues Powered by Aerospace Segment

• ST Engineering's 3Q19 revenue growth of 27% y-o-y was the highest in over a decade, driven primarily by the Aerospace segment. See ST Engineering Announcements.
• Aerospace revenue jumped 53% y-o-y, driven by the consolidation of its MRAS acquisition - which we estimate accounted for 3/4ths of segmental growth - as well as end-of-programme reviews, which were exceptionally high during the quarter. The other segments with revenue growth were Electronics, up 10% y-o-y, Land Systems, up 3% and Marine, up 13%.
• Order book touched a record SGD15.9b with cSGD2.2b expected to be recognised in 4Q19.

Core PATMI Up 33% Y-o-y, Excluding Two One-offs

• Marine booked a cSGD11m provision related to an arbitration claim on a contract executed in 2011. This has been fully provisioned for after an arbitration ruling by US courts in Oct 2019.
• The other significant one-off was a cSGD41m allowance for inventory obsolescence in Aerospace. Recall that ST Engineering announced a couple of years ago its progressive write-downs of aircraft spare-parts inventory related to some legacy programmes. Management indicated this is now at a close.

Newtec Closed as Well; Still on M&A Trail

• In addition to its MRAS and Glowlink acquisitions that were concluded in earlier quarters, management closed its Newtec acquisition in early Oct. Newtec would be consolidated from the current quarter.
• ST Engineering is still on the lookout to acquire new capabilities. We expect more Smart City-related M&As with management targeting a doubling of revenues from this business by FY22 from the cSGD1b achieved in FY17. (See recent note: ST Engineering - Maybank Kim Eng 2019-10-28: Like To Like Again).

Source: Maybank Kim Eng Research - 11 Nov 2019