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Morningstar | ST Engineering's 1Q Profit Growth Reaches Double Digits for First Time in a While; FVE Unchanged

Narrow-moat-rated Singapore Technologies Engineering saw a decent first-quarter performance as net profit grew 11% year over year, with its larger aerospace and electronics segment earnings supported by a stronger uptick in its marine activities. The performance is largely in line with our full-year profit forecast and we are keeping our earnings forecasts and fair value estimate of SGD 4.36 unchanged. Profitability was within expectations, with EBITDA margin at 12% in the first quarter. The bottom line was helped by a lower effective tax rate of 16%, but we expect this to normalize during the year.

STE’s second half should see contributions from the acquisition of MRA Systems, which was approved April 18; we expect it to contribute around SGD 900 million to revenue, which should lift STE’s full-year revenue growth to almost 23%. We expect organic growth in aerospace activities of 4% otherwise. However, the impact to overall group profit should be mitigated partly by costs related to the purchase of Newtec. We have reflected a dip in electronics segment profit this year because of Newtec. Nonetheless, STE looks set to meet our estimate for 19% EPS growth in 2019.

The company’s order book wins were decent, and management guides that around SGD 4.2 billion worth of sales should be delivered this year. If we were to make revisions, it would be to our land systems and marine segments income estimates, with the latter’s profit margin far improved due to project mix while the former is incurring startup costs related to various projects, including the autonomous bus in Singapore. However, these two segments are relatively small and the deviations offset each other.