• While ST Engineering's 2020F profit will decline on weak demand, supply chain disruption and workforce disruption amidst the COVID-19 pandemic, normalisation of order deliveries across all segments should support the return of profit growth in 2021F.
• Barring the risk of COVID-19 infections resurging, ST Engineering should continue to outperform the STI. It still has a well-diversified business portfolio, record-high orderbook, and offers sustainable DPS – which puts it in a far superior position vs other large-cap STI counters.
• BUY, SGD3.90 Target Price, 14% upside with 4% FY20F yield.

Diversified Business Model and Sustainable Long-term Growth

• With its business spread across four segments (Aerospace, Electronics, Land Systems and Marine) and across geographies, ST Engineering (SGX:S63) has a well-diversified portfolio – ensuring resilient earnings through business cycles. Moreover, its record orderbook of SGD16.3bn offers two year of revenue visibility.
• ST Engineering remains focused on long-term growth, by strengthening core businesses and capitalising on new demand opportunities in cybersecurity and robotics. We expect Smart City initiatives, in Singapore and overseas, to be a key contributor to earnings in the long term.

Can Now Perform Aircraft Inspection Using Drones

• ST Engineering has received the authorisation from Civil Aviation Authority of Singapore to use its in-house developed drone solution, DroScan, to carry out general visual inspection during aircraft maintenance on approved aircraft models at its Singapore MRO facilities. Over the past year, it has showcased the solution’s capabilities and benefits through trials with participating airline customers.
• DroScan reduces the need to set up bulky ground equipment required during manual inspections. Instead, inspection can be done using live video feeds and images captured by the drones. These images can be fed through algorithms that can help detect and classify defects. ST Engineering’s DroScan already has additional capabilities that make it suitable for future operations within Singapore’s civil aerodromes.

Sustainable Dividends, Reasonable Valuations and Inorganic Growth Potential

• Despite an earnings decline in 2020F, ST Engineering should be able to sustain its DPS of 15 SG cents, vs that of other large-cap companies, which are cutting dividends.
• Given expectations of a strong earnings recovery in 2021, ST Engineering should trade above its historical average. With its positive FCF generation, strong balance sheet and liquidity, the company could also undertake earnings-accretive acquisitions to support long-term growth.

Key Risks

• Slower recovery in the Aerospace maintenance, repair and overhaul business, deferment of contracts in Electronics, lower contributions from new acquisitions, and delays in Singapore’s Smart Nation initiative could derail long-term earnings growth recovery.

Source: RHB Invest Research - 19 Jun 2020