• Reiterate BUY, SGD4.55 Target Price implies 9% upside plus 3.6% yield. See ST Engineering Share Price; ST Engineering Target Price.
• ST Engineering’s double-digit profit growth outlook for 2020-2021, record-high orderbook with more than two years of revenue visibility, positive FCF-generation capability, reasonable dividend yield and ability to undertake earnings-accretive acquisitions led it to outperform the STI by 15% YTD. See Straits Times Index constituents share price performance YTD.

New Engine Maintenance Order Win for Aerospace

• ST ENGINEERING (SGX:S63) has secured a 15-year engine maintenance-by-the-hour contract from Japan Transocean Air (JTA). Under the agreement, ST Engineering will provide an integrated suite of engine maintenance, repair and overhaul (MRO) solutions that include off-wing maintenance support, on-wing services and technical support to JTA’s Boeing 737NG fleet. These services will be provided over a period of 15 years from 2020 at ST Engineering’s engine MRO facilities in Singapore. See ST Engineering Announcements; ST Engineering Latest News.
• Japan Transocean Air (JTA), a subsidiary of Japan Airlines, operates 12 Boeing 737-800 aircraft, as per data from airfleets.net.
• ST Engineering’s component engine repair & overhaul business accounted for 13% of its 2018 net profit.

Record-high Orderbook

• With reported order wins worth SGD5.4bn in 9M19, ST Engineering has amassed an outstanding orderbook of SGD15.9bn, which is an all-time high. This orderbook provides revenue visibility of 2.5 years.
• We remain optimistic on ST Engineering delivering strong growth in 4Q19, as SGD2.2bn of the outstanding orderbook is expected to be delivered during the last quarter of 2019. ST Engineering reported a SGD1.8bn of revenue in 4Q18.

Small Divestments; Continues to Optimise Its Business Portfolio

• With an ongoing focus on optimising its business portfolio, ST Engineering divested small stakes in two entities during Nov 2019. It divested its pilot training business in Australia for SGD9.3m, at a gain of SGD1m. It also sold all of its 49% stake in Takata CPI Singapore (a JV company) for SGD5.3m, at a gain of SGD1m.

Contribution From Acquisitions to Drive Near-term Earnings

• ST Engineering has reported strong profit growth in the last two quarters, aided by contributions from Middle River Aerostructure Systems (MRAS), a US-based OEM engine nacelle manufacturer that it acquired early this year. We expect this profit contribution to increase, in line with the ramp-up in output at MRAS.
• Key downside risks include failure to sustain its current rate of strong order wins, an increase in MRAS & Newtec integration costs, and lower-than-estimated contributions from recently-completed acquisitions.
• We maintain that the recently-completed Newtec and Glowlink acquisitions should remain earnings-accretive, despite SGD20m in integration costs.
• ST Engineering remains one of our Top Picks, with earnings contributions from the Newtec acquisition and continuing strong order wins as key re-rating catalysts. See also report: Singapore Equity Strategy - Expectations For The Rest Of 2019.

Source: RHB Invest Research - 29 Nov 2019