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ST Engineering continues its winning ways

PC Lee
PC Lee9/6/2018 11:31 AM GMT+08  • 3 min read
ST Engineering continues its winning ways
SINGAPORE (Sept 6): ST Engineering isn’t showing any sign of easing off when it comes to clinching contracts.
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SINGAPORE (Sept 6): ST Engineering isn’t showing any sign of easing off when it comes to clinching contracts.

Last week, the integrated defence & engineering group won a contract to provide engine MRO services for the Boeing 737NGs belonging to Jet Airways.

The agreement was an add-on to a contract announced in 2015, which covered only a portion of the airlines’ 737NG fleet.

Under the latest contract, Jet Air’s entire fleet of 80 737NGs will be covered, doubling the contract value to US$700 million ($962.4 million).

ST Engineering will also provide an integrated suite of engine MRO solutions, including off-wing engine heavy maintenance checks, on-wing services as well as technical support.

These services will be provided over a period of six years from 2019.

The aerospace contract brings ST Engineering’s 2018 order wins to $3 billion, $2 billion short of 2017 record order wins.

Analysts say the order win is positive for the component engine repair & overhaul (CERO) division of ST Engineering Aerospace which has seen high utilisation rates and an uptick in shop visits since late 2017 and 2018.

CERO’s contribution to aerospace PBT has increased to 30% in 2Q18 from 15% in 2015. It has also seen its PBT margin expand to 11.3% in 2Q18 from 6.3% in 1Q17.

“We believe the Jet Airways contract will assist the aerospace business to maintain the profitability that it is currently witnessing at its CERO division,” says RHB analyst Shekhar Jaiswal in a Thursday report.

In addition, ST Engineering, along with Siemens, won a $18.8 million contract from Singapore’s Land Transport Authority to develop and implement a Rail Enterprise Asset Management System (REAMS) for Singapore’s MRT network.

The implementation of REAMS will start with the Downtown Line (DTL) and other rail lines will be added in phases thereafter.

ST Engineering and Siemens will develop a software platform that will house and analyse data from DTL’s maintenance management system, its fleet of 92 trains and other key systems that are critical to DTL’s efficient operation.

The core functions of REAMS are expected to be operational by mid-2020. We believe the order size could get scaled up once more MRT lines are added to REAMS.

Year to date, ST Engineering has outperformed the STI Index by 7.3% and offers a dividend yield of 4.6%, which is higher than 4% yield for the STI Index.

The company also has a strong balance sheet and offers an ROE of more than 20%. The stock is trading at 16 times 2019 forward earnings, below five-year average forward earnings of 19 times.

According to Jaiswal, ST Engineering should see a gradual revival in earnings growth, aided by an increased MRO activity, P2F conversions, delivery of smart city-related contracts in and outside Singapore and defence-related contracts.

Its outstanding $13.4 billion orderbook offers a two-year revenue visibility and more than 4% yield should provide support to the share price.

“We believe the continuation of order wins... ST Engineering is one of our Singapore 2H18 Top Picks,” says Jaiswal who is reiterating its “buy” with $3.97 target price.

Year to date, shares in ST Engineering are up 2 cents at $3.29.

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