New, leaner organisational structure is seen sharpening business focus

 

ST ENGINEERING remains a defensive, safe-haven pick, amid better-than-expected order wins in the third quarter and a new, leaner organisational structure, according to analysts.

 

The group on Tuesday announced S$1.7 billion in order wins in Q3, with a particularly strong showing for the electronics division, which clinched S$1.1 billion worth of new orders.

 

DBS analysts Suvro Sarkar and Jason Sum said in a research note that tendering activity for smart city projects is strong, as governments prioritise infrastructure spending to revive economic growth.

 

They added that the high certainty of ST Engineering' s dividend yield of about 4 per cent provides support. The group' s balance sheet remains healthy and operating cash flows were strongly positive in the first half of 2020, boosting confidence in a steady annual dividend payout of S$0.15 per share, Mr Sarkar and Mr Sum said.

 

OCBC Investment Research noted that ST Engineering has outperformed the broader market since its Aug 14 research note on the stock. The group' s share price has appreciated by about 16 per cent compared to the 7 per cent rise in the Straits Times Index.

 

" The stock has been a beneficiary of the recent news relating to positive developments on the vaccine front - the group' s aerospace segment, for instance, should see some light after the Covid-19 outbreak put immense pressure on the global aviation industry' s profitability and cash flows," OCBC' s research team said.

 

Analysts from DBS and CGS-CIMB were also upbeat on ST Engineering' s move to reorganise into two main clusters from the new year - commercial, as well as defence and public security, which replace the sector-structure of aerospace, electronics, land systems and marine.

 

Mr Sarkar and Mr Sum said ST Engineering' s new organisational structure should sharpen business focus, improve visibility and resonate better with investors.

 

Meanwhile, CGS-CIMB analyst Lim Siew Khee said in a separate report that the reorganised commercial and defence and public security clusters could mean leaner structure and better operating leverage.

 

ST Engineering' s cost-cutting measures and revenue recovery will also help to offset the year-on-year relief decline. The group expects to receive more than S$300 million in government relief globally in 2020 and about S$100 million in 2021.

 

" We like ST Engineering for its diversified business, even within aerospace as when maintenance, repair and overhaul work reduces, passenger-to-freighter work may backfill utilisation ahead," Ms Lim said.

 

DBS' s research team has maintained " buy" on ST Engineering. It raised its target price to S$4.20 from S$3.80 to factor in earnings upgrade for fiscal 2021, as well as higher valuation pegs in line with improved market sentiment related to promising developments on the Covid-19 vaccine front.

 

CGS-CIMB reiterated " add" on the stock and raised its target price to S$4 from S$3.76 as ST Engineering' s reorganised structure will allow it to better execute its global growth in smart city and international defence business.

 

Meanwhile, OCBC maintained " buy" on ST Engineering. It also raised its fair value on the stock to S$4.30 from S$3.90.

 

MAINBOARD-LISTED ST Engineering expects full-year revenue to be around 10 per cent lower for FY2020 than in FY2019, it said in its third-quarter business update on Wednesday.

 

ST Engineering had previously provided revenue guidance in August that FY2020 revenue was expected to be between 5 per cent and 15 per cent lower than FY2019. It said in the exchange filing on Wednesday that group revenue performance to date remained within the guidance, and the expectation was now for revenue to be close to the midpoint of its earlier guidance.

 

For its aerospace segment, ST Engineering said that a faster recovering domestic travel sector augurs well for its narrowbody maintenance repair and overhaul (MRO) work.

 

It also said it is pursuing passenger-to-freighter conversion opportunities, as there is market demand for dedicated freight aircraft, given limited passenger flights with belly load capacity. ST Engineering also noted that fleet retirements of passenger planes have added to feedstock availability.

 

It secured around S$600 million in aerospace orders for the quarter, taking the total for the first nine months of 2020 to about S$2 billion.

 

ST Engineering also secured around S$1.1 billion in new orders for its electronics segment in the third quarter, taking its nine-month total to S$2.3 billion. The orders include rail electronics projects, smart digital building solutions, and defence and public security projects.

 

ST Engineering said its full workforce is back at its Singapore yards for the marine sector, and it completed numerous ship repair projects, rig repair and related fabrication works.

 

It added that its defence land platform business remains steady. However, it noted that tenders for road construction and specialty vehicles are on hold.

 

As at September 2020, its order book stood at S$15.8 billion, slightly lower than the S$15.9 billion in June.

 

ST Engineering said it will focus on opportunities to capitalise on new demand arising from Covid-19, such as cybersecurity and sensors. It also has group-wide efficiency and productivity initiatives on track to target to offset the effect of lower level of government support in 2021.

 

The group announced on Tuesday evening that it will be reorganised into two main clusters from the new year - Commercial, and Defence & Public Security. These two clusters replace the sector structure of Aerospace, Electronics, Land Systems and Marine.

 

The Commercial cluster will drive the group' s international growth in commercial aerospace, urban solutions and satellite communications. This cluster integrates the group' s smart-city technologies and capabilities, which now reside in the four sectors, into one unit.

 

The Defence & Public cluster will be made up of four business areas - digital systems and cyber, land systems, marine and defence aerospace. This cluster will focus on serving customers in defence and public security, and in critical infrastructure segments. It will also continue to pursue growth in international defence, as well as public safety and security businesses.