Despite FY18 earnings miss, ST Engineering still on the right track for future growth
SINGAPORE (Feb 22): Analysts are maintaining a positive stance on ST Engineering, despite a drop in the group’s 4Q18 and FY18 earnings.
ST Engineering recorded a 26% y-o-y drop in its 4Q18 earnings to $124.5 million, bringing FY18 earnings to $494.2 million, 2% lower y-o-y.
Revenue for the quarter was 5% higher y-o-y at $1.77 billion, while profit before tax dropped 7% y-o-y to $160.5 million.
See: ST Engineering reports 2% fall in FY18 earnings to $494 mil
Following the announcement, Maybank Kim Eng is keeping its “buy” call on ST Engineering with a lower target price of $4.25 from $4.35 previously.
For the 4Q18 and FY periods, the group’s results were peppered with one-off items, mostly in relation to the group’s periodic business portfolio evaluation and rationalisation.
These included divestment losses from closure of a pilot training school in the US and a road construction entity in India, full impairment of auto MRO and road construction businesses in Brazil and an SG&A increase for transaction costs (advisory and legal fees) related to its pending acquisition of MRAS.
In a Thursday report, analyst Neel Sinha says, “A relatively small area of the business that continues to be a drag is its US computer hardware subsidiary VT Miltope.”
Meanwhile, the project pipeline and outlook for FY19 for Aerospace, Electronics and Land Systems remains positive. But the Marine segment outlook is muted due to the industry slump.
Nonetheless, segment pre-tax profit has been growing sequentially for four quarters indicating that cost control and right-sizing measures are bearing fruit.
Sinha remains positive on the group’s growth fundamentals.
RHB Research also continues to rate ST Engineering a “buy” with a higher target price of $4.10 from $3.97 previously.
In a Friday report, analyst Shekhar Jaiswal says, “ST Engineering should continue to register a profit growth revival, with 2019F growth to exceed the 9% registered in 2018.”
He also predicts the group’s FY19 profit growth will be aided by ongoing contributions from Aerospace, delivery of smart city-related contracts in and outside Singapore by Electronics, and defence-related contracts and improvement in earnings for Marine.
On Feb 18, Singapore’s finance minister Heng Swee Keat announced the country’s Budget 2019. He said that some $22.7 billion or over a quarter of the total budget expenditure will go to the defence and home sector. Half of the group’s revenue is derived from defence-related contracts, and it may benefit from this budget increase.
The group has reported an outstanding orderbook of $13.2 billion, providing revenue visibility for two years, while $4.9 billion will be delivered in 2019. Baring the risk of a trade war escalation, the group remains confident of witnessing a revival in Aerospace order wins in 2019.
Similarly, CGS-CIMB Research is maintaining its “add” recommendation on ST Engineering with a higher target price of $4.08, compared to $3.94 previously.
The group’s Aerospace unit recorded a flat FY18 net profit of $245 million compared to the previous year, which reflected the MRAS acquisition cost, as well as net divestment gains from the sale of Airbus Helicopters, STAG and pilot training school during the year.
Upcycle trend in engine maintenance repair remains and management expects to trend industry’s growth of 5-6% per annum.
However, the Components outlook is slightly challenged by heightened delivery of new generation aircraft such as A320neo and B737, which defer components replacement. PTF programme will support the EMS revenue, but the learning curve costs could hamper margins in the short-term.
In a Friday report, analyst Lim Siew Khee says, “Therefore, completing the MRAS acquisition is critical for Aerospace’s growth. With MRAS, we project 13-26% y-o-y net profit growth for Aerospace in FY19-20F.”
As at 1.05pm, shares in ST Engineering at trading at $3.68 or 4.9 times FY19 book with a dividend yield of 4.2%.
