Morningstar | Adding STE to Our Best Ideas List, Things Are Looking Up Despite Global Gloom
We add narrow-moat ST Engineering to our Best Ideas list because we expect this stock will outperform during this period of global growth uncertainty. STE has a defensive income stream, with its core aerospace and electronics segments shielded from most macro headwinds, while defense orders make up about one third of revenue. We think this is an attractive entry level for STE because, although it has already been outperforming the FTSE Straits Times Index, rising 8.1% year to date versus a decline of 2.6% for the index, we believe there is room for upside. STE's growth prospects will remain attractive over the next few years as it adjusts its portfolio of assets to focus on core segments and improves capital efficiency. STE's fair value estimate is unchanged at SGD 4.36.We are optimistic over STE's earnings growth potential, with management continuing to divest noncore assets while adding abilities to strengthen its moats in its core aerospace and electronics businesses. The latest example is the establishment of a joint venture to undertake MRO activities in Vietnam with Vietnam Airlines. While it won't lift earnings much, the move is positive because it strengthens STE's position as the world's leading independent airframe MRO service provider, particularly as Vietnam Airlines is the country's national carrier. A more significant development for earnings is the acquisition of engine nacelles-maker MRA Systems, or MRAS, which closed in April. The partial recognition of MRAS lifts the aerospace unit earnings growth forecast to 16% in 2019 and 30% in 2020. The strong growth also reflects our expectation that MRAS' income should grow in line with the Airbus A320neo aircraft deliveries.
Current macro headwinds are not expected to affect STE. Its activity stream is less cyclical although supply chain disruptions could lead to higher costs that would have to be passed on. STE could see benefits from an aversion to Chinese technology if the U.S. ban continues.
Singapore Technologies Engineering is an investment holding company. Co. and its subsidiaries have four business sectors: Aerospace, which provides a range of aircraft maintenance, engineering and training services for both military and commercial aircraft operators; Electronics, which engages in the design, development and integration of electronics and communications systems; Land Systems, which delivers integrated land systems, specialty vehicles and their related through-life support; and Marine, which provides customised shipbuilding, repair and conversion services to both naval and commercial vessels, at Co.'s yards in Singapore and the U.S.
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