• Amidst an unprecedented aviation traffic decline, airlines are now in cash-preservation mode: Grounding most of their fleets, accelerating older aircraft retirement, and likely deferring maintenance works on existing fleets.
• ST Engineering (SGX:S63) remains our Top Pick, given its relatively resilient and well-diversified business portfolio that offers strong revenue visibility from a record-high orderbook and earnings contributions from recently completed acquisitions.
• We trim 2020-2022 estimates 4-8% on a weak revenue outlook for aviation MRO.

Diverse Portfolio of Businesses Helps Mitigate the Impact From a Weak Economic Environment

• While ST Engineering is not immune to the adverse effects of a weak economic environment, its diverse business portfolio – which covers businesses across the aerospace, electronics, land systems, marine and defence sectors – allows the company to mitigate the overall negative impact on earnings.
• We believe various government grants and business-supportive measures announced by the Government will also help in offsetting some near-term revenue weakness.

No Change in Operations, as STE’s Businesses Are “essential Services”

• In its latest press release, ST Engineering said its various businesses, including those in aerospace, marine, automotive, and electronics, have been classified as a provider of essential services in Singapore and the US. As such, it will be able to continue operating as normal from the relevant premises during this period of enhanced social distancing.
• ST Engineering’s board is taking a 10% cut in fees, while President & CEO Vincent Chong has also taken 10% pay cut. Other senior personnel are taking 5-10% pay cuts. These changes will take effect from 1 May.

Long-term Growth Drivers Still Intact

• Gradual delivery of its record-high orderbook – which stands at SGD15.3bn and offers > 2 years of revenue visibility – along with moderated by positive earnings contributions from the acquisitions of Middle River Aerostructure Systems (MRAS), Newtec, and Glowlink, should continue to drive earnings growth over the forecasted period.

Key Re-rating Catalysts and Downside Risks

• Continuing strong order wins and new earnings-accretive acquisitions could be the key re-rating catalysts.
• Key downside risks: A sharper-than-anticipated slowdown in the aerospace MRO business beyond 2020, higher Newtec integration costs, and lower contributions from acquisitions.

Source: RHB Invest Research - 17 Apr 2020