November 12, 2019

3Q19 revenue growth of 27% YoY was the highest in over a decade, driven primarily by the Aerospace segment. Aerospace revenue jumped 53% YoY, driven by the consolidation of its MRAS acquisition – which we estimate accounted for 3/4ths of segmental growth – as well as end-of-programme reviews, which were exceptionally high during the quarter. The other segments with revenue growth were Electronics, up 10% YoY, Land Systems, up 3% and Marine, up 13%. Order book touched a record SGD15.9b with cSGD2.2b expected to be recognised in 4Q19.

Marine booked a cSGD11m provision related to an arbitration claim on a contract executed in 2011. This has been fully provisioned for after an arbitration ruling by US courts in Oct 2019. The other significant one-off was a cSGD41m allowance for inventory obsolescence in Aerospace. Recall that STE announced a couple of years ago its progressive writedowns of aircraft spare-parts inventory related to some legacy programmes. Management indicated this is now at a close.

In addition to its MRAS and Glowlink acquisitions that were concluded in earlier quarters, management closed its Newtec acquisition in early Oct. Newtec would be consolidated from the current quarter. STE is still on the lookout to acquire new capabilities. We expect more Smart Cityrelated M&As with management targeting a doubling of revenues from this business by FY22 from the cSGD1b achieved in FY17.

3Q19 was a strong quarter with group revenue posting its highest YoY growth in over a decade. Excluding one-off provision and inventory impairment, core PATMI rose 33% YoY/25% QoQ with 9M19 accounting for 79% of our FY19 forecast. STE’s various growth initiatives through M&A, efficiency improvements and portfolio rationalisation appear to be on track. Our FY19-21E forecasts, DCF-based (7.9% WACC; 2% TGR) SGD4.50 Target Price and BUY rating are unchanged. – Maybank Kim Eng

Closing Price: SGD4.17