Morningstar | We Still Like Singapore Technologies Engineering's Direction Following 3Q Results; FVE to SGD 3.74. See Updated Analyst Note from 14 Nov 2018
While Singapore Technologies Engineering's third-quarter revenue was flat, slightly better profitability and timing factors point to full-year performance that should be in line with our expectations. We tweak our earnings projections and raise our fair value estimate to SGD 3.74, largely due to time value. We continue to like the direction that the firm is headed in as it moves up the value chain to provide more original equipment products to supplement its MRO services and as it builds scale and broadens the integration of its various products into its command and control systems. We expect EPS CAGR to rebound to 11.6% over the next five years after sliding 10.3% from 2014-17, helped also by a recovery in the marine sector. Dividend yield of 4.3% remains an added attraction.Our fair value estimate already factors in contributions from nacelles manufacturer MRA Systems, or MRAS, for USD 630 million net of cash and debt. The acquisition is waiting to clear foreign ownership approvals in the U.S. and anti-trust regulations in Brazil and France but is on track to complete by the end of March 2019. The attraction of MRAS is that it could garner 60% market share of the nacelles in partnership with Safran Nacelles for the LEAP-1A engine that powers the A320neo aircraft. There have been more than 6,000 A320neo aircraft ordered so the OEM and spare parts demand has scale and longevity. According to available information, we expect MRAS' EBITDA margin to be slightly lower than ST Engineering's, which means the inclusion of MRAS leads to a reduction in our estimate of ST Engineering's EBITDA margin to 11.5% in 2019 from 12.5% currently. We anticipate a 20% uptick in its net profit in 2019 helped by the nine months contribution from MRAS.
Coupled with the expansion of its Pensacola MRO facilities, we see its net gearing rising to 0.46 times in 2019 from just 0.09 times in 2017. Free cashflow is expected to recover as spending normalizes, and we see no risk to dividends.
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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