Lack of aviation-related projects drags on ST Engineering's earnings

But the group has ample resources to pursue M&A should opportunities arise.

The lack of aviation-related projects are projected to drag down ST Engineering’s earnings by around 14% in FY2020, whilst FY2021 earnings are likely to shrink by 18%, according to a report by DBS Group Research.

The MRO segment will hit the group’s earnings most as airlines defer aircraft maintenance, cut flying hours, and reduce new aircraft orders.

However, compared to other aviation MRO players, the impact to ST Engineering’s bottom line would still be less pronounced, given the group’s diverse business segments and high exposure to defense and government-related work which tends to be less cyclical in nature, noted DBS analysts Suvro Sarkar and Jason Sum.

Even though the group has reduced its reliance to defence contracts over time, the segment still makes up 25% of ST Engineering’s revenue as of Q3 2019. Another 35% of revenue came from government agencies and the balance from commercial businesses.

Further, despite the challenging environment, ST Engineering has ample resources to pursue mergers and acquisitions (M&A) should the opportunity arise.

The group’s low gearing, strong access to capital markets and overall healthy balance sheet should enable it to capitalise on M&A opportunities, noted Sarkar and Sum.

ST Engineering’s order book stood at a record high of $16.3b as of Q1 2020, up from $15.3b in Q4 2019. The group also announced $1.6b in contract wins for Q1 on top of a Phase 2 contract for the production and supply of the Hunter Armoured Fighting Vehicle from the Singapore Ministry of Defence, which DBS estimates at $1b.

The group expects to recognise $4.5b over the next three quarters, although non-order book revenue remains a concern.

Meanwhile, the company’s smart city initiatives should also be a key long-term growth driver.

“Within Singapore’s Smart Nation framework, we estimate projects worth more than $1b in the near future, as the Singapore government pushes for smart technology usage across the utility, healthcare, housing and transport spaces. STE is aiming to more than double its annual smart city revenues by 2022, from 2017 levels of about $1b,” said Sarkar and Sum.

“ST Engineering’s proposed acquisition of Newtech is geared to position itself better in the smart city market, with enhanced satcom capabilities to address digital connectivity needs,” they added, further noting that Frost & Sullivan and Technavio have both estimated the global smart city market’s value at US$1.5t in 2020, from an implied US$600b as of end-2015, representing a CAGR of about 20%.

Dividend payout should also remain steady despite the subdued economic environment, with ST Engineering having maintained full-year dividends at $0.15 per share for the last few years. The group has also built up enough retained earnings to ensure that dividends are not affected by economic cycles.

“Even with the earnings decline we are projecting in FY2020, the group can still maintain $0.15 per share total dividends for FY20 at ~90% payout ratio,” Sarkar and Sum concluded.

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