October 15, 2019

ST Engineering (STE) is likely to outperform its industrials peers which we expect to see qoq and yoy declines in earnings this quarter. We estimate the STE group delivered 9% qoq and 12% yoy growth in profit (S$151m) for 3Q19 from a seasonally stronger 2H and full quarter earnings contribution from MRAS. Land system is the other growth driver with the progressive delivery of the Hunter Armoured Fighting Vehicle.

STE manufactures the ground equipment segment (routers, modem hubs, antennas, etc.) as well as provides system integration services. Combining both of its satcom subsidiaries, iDirect and the recently acquired Newtec, STE commands about 70-80% of market share in the aviation and broadcast industry and 18% of enterprise (e.g. banks, telco, retail) globally. Enterprise formed the largest portion of its modems revenue and is expected to grow by 8-9% p.a. vs. aviation at 15-20% p.a. and broadcast at 3-5% p.a. We estimate STE’s satcom contributed about 12% of its PBT and average growth of 10% p.a., represented mainly by iDirect in CSG. Management guided that the Newtec acquisition could add south of S$10m net profit in FY20F and north of S$10m thereafter, with some integration costs in 4Q19.

STE’s modular hub business model is scalable. Customers are able to set up the initial satcom network with a few remotes/routers and gradually scale up to hubs and complex networks, locking in customers in the long-term. Switching costs are typically high for customers to change the end-to-end satellite connectivity infrastructure. Some of the notable customers include Qatar Airways Verizon, Singtel, Arab Satellite Communications and Speedcast.

Demand for satcom systems is firstly backed by emergence of Low Earth Orbit (LEO) constellations, lower costs per bit that increase demand for small and low-cost integrated terminals. Secondly, more complex networks as satcom and 5G converge and thirdly, increased risk of satellite interference. STE has over the years built up its satcom capabilities via milestone acquisitions such as iDirect in 2005, Parallel Limited in 2010, Jettalk in 2018, Glowlink and Newtec in 2019. As such, maintain Add with a Target Price of S$4.36 on blended valuations. – CGS CIMB

Closing Price: S$3.99