Few stocks can maintain consistent dividend yields as the market dances to the beat of “animal spirits”. Yet since 2018, ST Engineering has delivered a consistent 4% dividend yield and 15 cents distribution per share (DPS), with analysts not expecting this to change any time soon.
Despite its not insignificant exposure to the aerospace sector, RHB analyst Shekhar Jaiswal and CGS-CIMB analyst Lim Siew Khee see ST Engineering delivering its usual 15 cents dividend at least until 2022. Both have reiterated “buy” calls on the counters, with Lim proclaiming the counter “relatively stronger than peers”.
“We remain optimistic on 2021’s earnings recovery – aided by order delivery normalisations across all business segments. A y-o-y higher order backlog, robust balance sheet, and ability to generate positive FCF and sustain dividend payments supports our call on the stock,” says Jaiswal in a Feb 22 broker’s report, citing a target price of $4.25.
Earnings in 2020 came in slightly ahead of expectations, with the engineering firm reporting a revenue of $7.2 billion and a net profit of $522 million. This was about 2.5% and 3% above Jaiswal’s projections respectively. Still, it did represent a 9% y-o-y drop for revenue and 10% y-o-y decline for net profit respectively.
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“The revenue decline largely came from Aerospace, which was impacted the most due to a weak aviation sector. Profitability was negatively impacted by intangible assets impairments and fair value changes of associates – it was partially offset by savings from productivity and cost reduction initiatives, as well as government support,” comments Jaiswal.
ST Engineering was also aided by generous government grants, receiving $350 million in FY2020 with $100 million expected to arrive in FY2021 as part of Singapore’s recent budget. Management, Lim says, are confident that the expected $250 million reduction in government support can be met by reduced costs such as reducing remuneration for sub-contractors, contract staff and overtime.
“[ST Engineering] remains confident of generating cost savings of $180 million, which will only partially offset the decline in government support. We lower 2021 profits by 3% to account for this shortfall in cost support,” says Jaiswal.
In any case, demand for passenger-to-freighter conversion in ST Engineering’s aerospace business is strong. STE inducted 10 aircraft in 2020 and is seen to induct another 30 in 2021 and 40 in 2022. It also has four PTF conversion lines and will increase this to eight by end FY2021 to meet the rising demand, with 3-12 months required for this process to be completed.
“We expect Aero profit to decline 5% y-o-y in FY2021 to factor in fewer nacelle deliveries and slow recovery in aviation travel,” says Lim. An impairment of assets saw its 2H2020 net profit coming in 16% lower h-o-h and 38% lower y-o-y at $87.9 million, which led to a loss of $1.5 million in Engineering & Material Services.
“Aero is on the lookout for new growth opportunities including engine/aircraft leasing to enhance recurring income,” reports Lim of CGS-CIMB.
Still, a bright spot has been Aircraft Maintenance & Modification’s (AMM), which saw a 67% y-o-y rise in net profit to reach $60 million - possibly on the back of government relief. ST Engineering’s aerospace business was also able to win $821 million in new contracts in 4Q2020. This was out of a group total of around $1.3 billion in 4Q2020. The firm won a total of $5.7 billion contracts in 2020 - an 18% y-o-y drop.
SEE: Diversified ST Engineering could see earnings growth despite coronavirus impact: analysts
With these new contract wins, following revenue delivery and project cancellations of about $ 1 billion, ST Engineering saw a higher order backlog of $15.4 billion y-o-y, implying a book-to-bill ratio of 2.2 years. Jaiswal sees $5.3 billion of this high outstanding order book to be delivered in 2021, accounting for 71% of his revenue estimate for the firm.
“Relative to its peers in the industrial/conglomerate space, ST Engineering has fared better in FY20 earnings although largely helped by the grant. We like the diversification of the group, disciplined cost management and strong ROE,” says Lim.
While defence contracts and a lifting of border restrictions would benefit the counter, investors should watch out for significant cost overruns and a resurgence in Covid-19. Jaiswal also warns of slower demand recovery and delays in new business initiatives as a potential risk.
As of 2.41pm, ST Engineering is trading 1.05% down at $3.78. Dividend yield is 3.97% and P/E ratio stands at 22.72.
