November 19, 2020

Relatively resilient
• 16% rise in share price since last report in mid Aug
• Reorganising business segments
• Revenue in 2020 to be ~10% lower

Investment thesis
Singapore Technologies Engineering’s (STE) growth outlook was positive, but the Covid-19 outbreak has
dimmed the outlook, mainly due to the aerospace segment. As for the group’s other operations,
Electronics accounted for 33% of FY19 net profit while Land Systems contributed 13%. The remaining 9% is from
Marine. Certain pockets such as satellite comms in Electronics have also been impacted, but most other
segments are not as affected, though we note that there could be supply chain issues which may result in
delays in production. About a third of the group’s business is defense-related.

Investment summary
• Outperformed broader market since last report – Since our last BUY-rated report, “Adapting to a
tougher environment” on 14 August 2020, the share price of ST Engineering (STE) has appreciated by ~16%
compared to the 7% rise in the Straits Times Index. The stock has been a beneficiary from 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 cashflows.

• Reorganisation of business segments – Effective 1 January 2021, STE will be reorganised as Commercial and Defence & Public Security clusters, replacing the
sector-structure of Aerospace, Electronics, Land Systems and Marine. From 2021, the group’s financial reporting will be based on new operating segments, and will be reflected in its financial results for first halfyear ending 30 June 2021. The Commercial cluster will fuel the group’s international growth through areas in Commercial Aerospace, Urban Solutions and Satellite Communications domains, to be known as Global Business Areas (or GBAs) to reflect the group’s desire to build global champions. The Defence & Public Security cluster will integrate capabilities to be organised as a single cluster comprising Defence Business Areas or DBAs, namely Digital Systems and Cyber, Land Systems, Marine and Defence Aerospace.

• Slightly less than half of net profit from aerospace last year – As Aerospace accounted for about 47% of STE’s net profit last year, Covid-19 had a knock-on effect on the group. Aerospace saw a 17% fall in net profit to SGD 105m in 1H20, but still managed to secure new orders of SGD2b in 9M20, with SGD0.6b in 3Q20. Within the aerospace business, maintenance, repair and overhaul (MRO) accounts for one-third of the business. As mentioned in our earlier report, downside pressure would be experienced in this segment as airlines defer maintenance schedules, and there would be idle fleet as well. Recall that STE does not really service SIA as SIA has its own MRO provider, which is SIA Engineering. As for the manufacturing side of aerospace, a reduction in production targets by plane manufacturers would also have negative spill-over effects on STE’s MRAS.

• Revenue in 2020 to be about 10% lower – STE won more than SGD1.7b new orders in 3Q20, with the
same amount expected to be delivered in the remaining months of 2020. Management has guided
that for 2020, revenue is expected to be close to the midpoint of 5-15% lower than 2019. Looking ahead,
STE is well positioned to benefit from areas like Passenger-to-Freighter conversion (increased
demand for cargo transport) and smart city solutions, including safe access control management. We
tweak our estimates and our fair value rises from SGD 3.90 to SGD4.30.

Potential catalysts
• Recovery in aerospace segment

• Significant growth in contract wins driven by
electronics sector

• Better-than-expected margins from projects

Investment risks

• Decline in oil prices pressuring marine business

• Lower-than-expected margins for new contracts

• Integration hiccups post acquisitions

• Longer than expected recovery in aerospace

BUY by OCBC Investment Research. Share price closed at $3.91.