Singapore Technologies Engineering

Analysts are buoyant on ST Engineering (STE), as the technology, defence and engineering conglomerate posted 3QFY2019 earnings in line with expectations on the back of record-high revenue.

For 3QFY2019 ended September, STE saw its revenue jump 27% to $2.07 billion — the highest y-o-y growth in over a decade.

The revenue surge was driven by Aerospace revenue, which soared 53% y-o-y to $1.1 billion on the consolidation of its recently acquired Middle River Aircraft Systems, as well as revenue recognised from various end-of-programme reviews.

However, earnings for the quarter grew a more moderate 3% to $139.1 million. The company’s 3QFY2019 earnings were affected by a provision of $14.2 million before tax made for the arbitration outcome with Hornbeck Offshore Services. Excluding this, earnings would have been 12% y-o-y higher at $150.3 million.

“STE’s 3QFY2019 core earnings of $150.3 million were in line, and its growth story is unfolding nicely,” says DBS Group Research lead analyst Suvro Sarkar in a Nov 12 report. “We are more conservative on margins and earnings compared with consensus, but still expect STE to generate high single-digit core earnings growth in FY2018-FY2021.”

Sarkar notes that STE’s current valuation of 20x FY2020F PER looks elevated at first glance. However, he says this is reflective of its record-high order book.

Lim Siew Khee, an analyst at CGS-CIMB Research, believes that STE’s diversified portfolio could continue to fuel its growth amid the challenging macroeconomic landscape. “We like STE for its diversification of business,” says Lim, who has a “high conviction” call on the counter.

The analyst notes that STE’s electronics contract wins have levelled up from close to $560 million per quarter in 2016-2018 to close to $780 million per quarter in 2019, on the back of more smart city-related projects.

Notably, in 3QFY2019, it secured $833 million of new contracts, [including] a bulky, close to $300 million smart city-related next-generation emergency responses management system for a public safety agency out of Singapore,” Lim says.

While OCBC Investment Research agrees that STE is a “clear outperformer”, it warns that “the upside may be diminishing”.

“On a total returns basis, STE has outperformed the Straits Times Index by a wide margin year-to-date, with the reinvested total return for STE at 22.7% and 10.4% for the STI, based on Nov 8 closing prices,” says OCBC’s research team in a note on Nov 11. —