Singapore Company Guide ST Engineering

Version 20 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report

DBS Group Research . Equity 12 Nov 2019

BUY Shifting to higher gear Last Traded Price ( 11 Nov 2019): S$4.00 (STI : 3,240.65) Price Target 12-mth: S$4.64 (16% upside) Order book at a record high. STE’s 3Q19 core earnings of S$150.3m was in line, and its growth story is unfolding nicely. Analyst The integration of MRAS in the Aerospace division is tracking Suvro SARKAR +65 81893144 [email protected] well, while the assimilation of Newtec and Glowlink in the Jason SUM +65 66823711 [email protected] Electronics segment is ongoing. STE ended 3Q19 with another record-high orderbook of S$15.9bn, underpinning healthy What’s New growth prospects in the near-to-medium term. We continue to • 3Q19 core earnings in line; on track for double digit like STE for: i) strong inorganic growth potential from recent earnings growth in FY19 acquisitions, plus ii) near-term organic growth driven by an • Orderbook soars to new high of S$15.9bn increase in workload at engine MRO shops, ramp-up of Airbus’ Passenger-to-Freighter programme and margin improvement in • Robust top line growth to offset impact on margins the Marine division; and iii) medium- to long-term growth from from integration of new investments and R&D expenses Smart City and IOT-related products and contracts, as well as • Maintain BUY with unchanged TP of S$4.64 robotics and automation solutions in transport, logistics, healthcare and hospitality domains. Dividend yield is at a decent 3.7% and we expect the stock to remain on investors’ radar Price Relative amid the current uncertain market environment owing to its S$ Relative Index defensive nature. 220

4.4 200

180 3.9 160 Where we differ: We are more conservative on margins and 3.4 140 120 earnings compared to consensus but still expect STE to generate 2.9 100 2.4 80 high single digit core earnings growth in FY18-21. Nov-15 Nov-16 Nov-17 Nov-18 Nov-19

ST Engineering (LHS) Relative STI (RHS) Valuation: Our TP of S$4.64 is based on a blended valuation framework Forecasts and Valuation FY Dec (S$m) 2018A 2019F 2020F 2021F which factors in both earnings growth and the long-term cash- Revenue 6,698 7,834 8,649 9,092 generative nature of STE’s businesses. STE’s current valuation EBITDA 924 1,127 1,261 1,325 of 20x FY20F PE looks elevated at first glance but is reflective Pre-tax Profit 621 698 787 852 of its record-high orderbook. Net Profit 494 565 624 674 Net Pft (Pre Ex.) 527 576 624 674 Net Pft Gth (Pre-ex) (%) 4.8 9.2 8.4 8.0 Key Risks to Our View: EPS (S cts) 15.8 18.1 20.0 21.6 Execution hiccups at new business segments and newly EPS Pre Ex. (S cts) 16.9 18.4 20.0 21.6 acquired entities could derail earnings. EPS Gth Pre Ex (%) 5 9 8 8 Diluted EPS (S cts) 15.8 18.1 20.0 21.6 At A Glance Net DPS (S cts) 15.0 15.0 16.0 17.0 BV Per Share (S cts) 71.9 75.0 80.0 85.6 Issued Capital (m shrs) 3,118 PE (X) 25.3 22.1 20.0 18.5 Mkt. Cap (S$m/US$m) 12,474 / 9,167 PE Pre Ex. (X) 23.7 21.7 20.0 18.5 Major Shareholders (%) P/Cash Flow (X) 19.5 18.0 13.8 12.3 Temasek Holdings Pte Ltd (%) 52.0 EV/EBITDA (X) 13.9 12.8 11.4 10.7 Free Float (%) 47.9 Net Div Yield (%) 3.8 3.8 4.0 4.3 3m Avg. Daily Val (US$m) 12.0 P/Book Value (X) 5.6 5.3 5.0 4.7 Net Debt/Equity (X) 0.0 0.6 0.5 0.4 GIC Industry : Industrials / Capital Goods ROAE (%) 22.2 24.6 25.8 26.1 Earnings Rev (%): 0 0 New Bloomberg ESG disclosure score (2018)^ 36.8 Consensus EPS (S cts): 18.5 20.9 21.8 - Environmental / Social / Governance 24.8 / 43.9 / 57.1 Other Broker Recs: B: 9 S: 1 H: 4 ^ refer to back page for more information Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

ed: JS/ sa: AS, PY, CS Company Guide

ST Engineering

WHAT’S NEW

Core earnings in line; growth trajectory intact

3Q19 net profit excluding one-offs in line with expectations. Balance sheet stretched by M&A, but AAA credit rating 3Q19 headline net profit came in slightly higher y-o-y at maintained. In 3Q19, STE’s net debt rose to S$1.3bn (vs S$139.1m (+3.4% y-o-y, +0.7% q-o-q). However, core net S$80m in 4Q18), and its credit metrics worsened, with net profit growth was more encouraging if we exclude several debt to EBITDA and net gearing ratio increasing to 1.7x and one-off items in 3Q18 and 3Q19 – on a pre-tax basis, STE 0.7x respectively. Nonetheless, future growth initiatives will booked c.S$14.2m provision related to a marine arbitration continue to be funded by debt. STE’s cost of debt is award against the company in 3Q19, whereas it enjoyed a favourable (on par with/slightly above LIBOR on recently one-time c.S$3.8m divestment gain and c.S$4.8m favourable established US commercial paper program) thanks to its AAA tax adjustment in 3Q18. Barring these items, core net profit credit rating, and the company still has significant debt would be in line with expectations at c.S$150.3m (+30.1% y- headroom given its ability to generate robust free cash flows. o-y, +8.8% q-o-q), with 9M19 net earnings of S$419.6m Looking ahead, we expect STE’s leverage to rise at a more forming close to 73% of our full year estimate (4Q is usually moderate pace amid a shift to more bolt-on acquisitions. In seasonally stronger). addition, STE’s cost of debt may increase slightly as it intends to spread out its debt maturity by refinancing its short-term Strong top line growth led by aerospace segment. 3Q19 debt with more long-term paper from 1Q20 onwards. revenue came in at S$2,069m (+27.2% y-o-y, +16.2% q-o- q), the highest quarterly figure ever achieved, underpinned by Strong earnings visibility as orderbook reaches a new high of significant growth in the aerospace division (S$1,051m; S$15.9bn, up from S$15.6bn as at end-2Q19. STE has +53% y-o-y, +25% q-o-q). Apart from an inorganic uplift already announced new order wins of S$5.4bn in 9M19, from MRAS, the aerospace segment also saw higher-than- compared to S$5.2bn for full-year FY18, and hence is usual revenue from several aerospace end-of-programme tracking for a bumper year of new order wins. The group reviews. The electronics division also achieved solid revenue expects to deliver S$2.2bn (14% of orderbook) in 4Q19, growth (+10% y-o-y, +9% q-o-q), driven by several overseas which should be another record revenue quarter and looks mobility and software systems projects, while the marine set to chart 10% revenue growth in FY20. segment grew by 13% y-o-y, supported by higher Solid top line growth to offset near-term margin decline. We engineering sales. believe STE’s sizable orderbook, and inorganic growth Softer margins in 3Q19, dragged by significant inventory and strategy will underpin healthy top line growth and mitigate receivables impairments. 3Q19 PBT margin narrowed to 8.1% potential margin challenges in the coming quarters. In (vs 3Q18: 10.2%, 2Q19: 9.5%), dragged by the aerospace addition to MRAS and Newtec, STE recently completed a and marine divisions. The aerospace division’s PBT margin S$28m bolt-on acquisition of Glowlink, a satcom player slipped to 7.5% in 3Q19 (vs 3Q18: 10.7%) as i) STE incurred specialising in mitigating satellite interference with anti- more costs associated with the integration of MRAS, ii) jamming capabilities in Sep-19. There could be some pressure encountered feedstock hiccups in its A330 P2F programme at on margins in the short term as STE will likely accelerate EFW (JV with Airbus), and iii) suffered inventory obsolescence investments in R&D, and the expansion of its network and provisions and impairment of trade receivables associated presence in growth areas like satellite communication and with the end-of-programme reviews. Total impairment loss smart city solutions, robotics and autonomous vehicles. on receivables and allowances for inventory obsolescence Additionally, STE expects to incur integration costs for MRAS amounted to ~S$92m in 3Q19, compared to just ~S$26m in of around S$5m and S$10m in 4Q19 and FY20 respectively, 1H19. and around S$20m on integration costs for Newtec over the next two years from 4Q19. However, higher revenues will still In the marine division, 3Q19 PBT margin contracted to 2.0% drive STE’s core earnings to grow at close to double digit (vs 10.9% in 3Q18), largely due to the above-mentioned CAGR between FY18-21. S$14.2m arbitration provision. Excluding that expense, the marine division’s PBT margin would have improved modestly Maintain BUY with unchanged TP of S$4.64. We trimmed our to 11.2%. Margins in the electronics and land systems FY19 headline net earnings by 1.0% to reflect the one-time divisions also shrank slightly as STE continues to invest marine arbitration provision, but largely maintained our core aggressively in R&D and other growth areas. earnings outlook for FY19-20, as we expect resilient top line growth to counteract margin stress.

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ST Engineering

Quarterly / Interim Income Statement (S$m) FY Dec 3Q2018 2Q2019 3Q2019 % chg yoy % chg qoq

Revenue 1,626 1,780 2,069 27.2 16.2 Cost of Goods Sold (1,284) (1,399) (1,635) 27.4 16.9 Gross Profit 343 381 433 26.4 13.6 Other Oper. (Exp)/Inc (188) (216) (249) 32.1 15.0 Operating Profit 154 165 185 19.5 11.7 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 9.58 12.9 7.02 (26.7) (45.4) Net Interest (Exp)/Inc (2.0) (8.4) (10.5) (428.8) (25.8) Exceptional Gain/(Loss) 3.77 0.0 (14.2) nm nm Pre-tax Profit 166 170 167 0.6 (1.7) Tax (23.8) (28.2) (25.1) 5.4 (11.1) Minority Interest (7.4) (3.3) (2.6) 64.8 (20.9) Net Profit 135 138 139 3.4 0.7 Net profit bef Except. 131 138 153 17.2 11.0 EBITDA 229 274 291 26.6 5.9 Margins (%) Gross Margins 21.1 21.4 20.9 Opg Profit Margins 9.5 9.3 8.9 Net Profit Margins 8.3 7.8 6.7

Source of all data: Company, DBS Bank

Blended Valuation Summary

Method Basis (FY19/20 blended) Parameter Value (S$m) P/E S$594.5m 22.0x PE 13,079 Div Yield 15.5 Scts 4.0% yield x shares outstanding 12,100 DCF WACC 6.0% 18,290

Average 14,489 No of shares 3,122 Value per share 4.64

Source: DBS Bank’s estimates

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Company Guide

ST Engineering

Aerospace sales growth (%) 29.3 CRITICAL DATA POINTS TO WATCH 29.6

25.3 Critical Factors 21.1 Conglomerate with diverse interests in defense and commercial 16.9 spheres. STE started out life as a defense contractor but has 12.7 11.9 leveraged its technical knowhow over the years to penetrate the 8.4 commercial market. It boasts multinational operations with a global 4.41 presence in 23 countries and 41 cities, and hires more than 22,000 4.2 2.05 2.17 0.0 employees. The group has reduced its reliance on the defense sector 2017A 2018A 2019F 2020F 2021F over time from 57% of revenues in 2002 to 25% in 3Q19, with another c.35% from government agencies and the balance from Electronics sales growth (%) commercial businesses. 12.5 12.2 12.3

Healthy orderbook drives visibility. As of end-3Q19, STE's orderbook 10.0 stood at a record S$15.9bn, and quarterly run rate of announced 7.5 6.7 6.56 order wins from the Aerospace and Electronics segments continue to 5.69 be promising. The orderbook provides robust revenue visibility for the 5.0 next few years, with roughly 2.2x book-to-bill ratio. 2.5

0.0 Move into new markets to boost Aerospace segment’s growth. 2017A 2018A 2019F 2020F 2021F

Continued initiatives by ST Aerospace to broaden its capabilities should propel its growth in the longer term. Apart from the climb Land Systems sales growth (%) 6.29 into component OEM space with the acquisition of US-based nacelle 6.41 6.2 systems provider MRA Systems, these include a partnership with 4.9 4.10 Airbus for passenger-to-freighter conversion of its A320/A321 and 3.1 A330 jets, expansion of component manufacturing business in 1.78 Europe, expansion of its cabin interior service solutions business, and -0.54 expansion of its mid-life aircraft leasing and engine leasing business. -2.85 Smart City initiatives should be a key long-term growth driver. Within -5.17 -4.7 Singapore’s Smart Nation framework, we estimate projects worth 2017A 2018A 2019F 2020F 2021F more than S$1bn in the near future, as the Singapore government Marine sales growth (%) pushes for smart technology usage across the utility, healthcare, 18.3 housing and transport spaces. STE is aiming to more than double its 18.5 annual smart city revenues by 2022 from 2017 levels of about 9.5 c.S$1bn. Globally, Frost & Sullivan and Technavio have both forecast 4.27 3.45 the global smart city market to be valued at c.US$1.5tr in 2020, from 0.4 an implied c.US$600bn as of end-2015, representing a CAGR of -8.6 about 20%. STE’s proposed acquisition of Newtec is geared to -9.95 position itself better in the smart city market, with enhanced satcom -17.6 capabilities to address digital connectivity needs. -26.6 -24.17 2017A 2018A 2019F 2020F 2021F

Inorganic growth plans. STE will continue to look at acquiring Source: Company, DBS Bank businesses, which are either complementary to existing ones, or would help in moving up the value chain in certain sectors, in order to maintain its growth momentum.

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Company Guide

ST Engineering

Leverage & Asset Turnover (x) 0.9 Balance Sheet: 1.00

Healthy balance sheet can drive M&A ambitions. STE’s balance sheet 0.80 0.9 should remain reasonably healthy even after the debt-financed 0.60 acquisition of MRA Systems and the proposed acquisition of Newtec. 0.8

We project net debt/equity to reach around 0.6x by end-FY19, which 0.40 is a more optimal use of its balance sheet strength. Further debt- 0.8 financed acquisitions may involve slightly higher cost of debt, 0.20 although STE may consider the equity fund-raising option as well in 0.00 0.7 2017A 2018A 2019F 2020F 2021F the future if M&A opportunities arise. Gross Debt to Equity (LHS) Asset Turnover (RHS)

Dividend payout should remain steady. Strong operating cash flows Capital Expenditure S$ m provide support to a decent dividend yield of around 3.8-4.0% for 1,600.0 FY19-20. We expect STE’s dividend to be 15 Scts per share in FY19 1,400.0 and 16 Scts per share in FY20. 1,200.0 1,000.0 800.0 Share Price Drivers: 600.0 Strong order wins. Total announced order wins YTD-2019 amounted 400.0 to S$5.4bn, a significantly stronger run rate than announced orders 200.0 0.0 of S$5.24bn in full-year FY18. More order win announcements in 2017A 2018A 2019F 2020F 2021F

FY19/20 would help boost the share price. Capital Expenditure (-)

Environment, Social, Governance Earnings delivery from acquisitions. The acquisition of MRAS was completed in April 2019, and the acquisition of Newtec will be 39 completed in 4Q19. This will result in strong y-o-y showing in 37 earnings from 2H19 onwards, if earnings execution is on track. 35 33 Key Risks: 31 Aerospace margins could come under pressure if execution in new 29 market segment is poor. In the Aerospace segment, headwinds 27 posed by lower work content and longer maintenance intervals at 25 the traditional airframe and engine MRO businesses are to be Y2015 Y2016 Y2017 countered by growth in new markets and businesses such as P2F STE SP EQUITY Peers conversion work on the Airbus 330 models and the ramp-up of new MRO facilities in Europe and China. Execution risk is therefore Forward PE Band (x) present. (x)

24.2 Environment, Social, Governance: +2sd: 23.1x 22.2 ST Engineering’s ESG score of 36.8 is better than SIA Engineering’s +1sd: 21.6x score but worse than other blue chip Singapore names like SIA and 20.2 Avg: 20x

Starhub. STE has been actively working on a set of robust targets to 18.2 -1sd: 18.5x reduce its environmental footprint. From 2016 to 2018, STE has been -2sd: 17x 16.2 able to reduce energy consumption intensity, greenhouse gas emission intensity and water consumption intensity each year. STE 14.2 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 currently has rooftop solar systems installed on 17 roofs across its facilities, which when fully operational, is expected to account for PB Band (x) (x) 9.2% of annual energy consumption. 6.5

6.0 Company Background +2sd: 5.66x 5.5 ST Engineering (STE) is an integrated engineering group in the +1sd: 5.28x 5.0 aerospace, electronics, land systems and marine sectors. The Avg: 4.91x company has over the years diversified its businesses and 4.5 -1sd: 4.53x geographies. -2sd: 4.15x 4.0

3.5 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19

Source: Company, DBS Bank

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ST Engineering

Segmental Breakdown FY Dec 2017A 2018A 2019F 2020F 2021F Revenues (S$m) Aerospace 2,535 2,647 3,422 3,830 3,913 Electronics 2,011 2,143 2,404 2,700 2,853 Land Systems 1,244 1,282 1,345 1,428 1,518 Marine 637 574 599 619 732 Revenue growth driven Others 94.0 52.0 65.0 71.5 75.1 by MRAS acquisition Total 6,521 6,698 7,834 8,649 9,092 PBT (S$m) Aerospace 319 320 321 385 419 Electronics 200 225 246 266 298 Land Systems 85.0 62.3 82.6 74.7 89.2 Marine 22.4 50.3 68.8 75.4 61.0 Others (14.3) (36.6) (9.8) (14.3) (15.0) Total 612 621 708 787 852 PBT Margins (%) Aerospace 12.6 12.1 9.4 10.1 10.7 Electronics 10.0 10.5 10.2 9.9 10.4 Land Systems 6.8 4.9 6.1 5.2 5.9 Marine 3.5 8.8 11.5 12.2 8.3 Others (15.2) (70.4) (15.0) (20.0) (20.0) Total 9.4 9.3 9.0 9.1 9.4

Income Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F Revenue 6,521 6,698 7,834 8,649 9,092 Cost of Goods Sold (5,208) (5,292) (6,244) (6,832) (7,183) Gross Profit 1,313 1,406 1,590 1,816 1,909 Other Opng (Exp)/Inc (732) (774) (882) (1,005) (1,042) Operating Profit 580 631 708 811 867 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 49.3 49.1 50.0 51.0 52.1 Net Interest (Exp)/Inc (18.0) (27.0) (49.9) (74.9) (66.9) Exceptional Gain/(Loss) 0.0 (32.6) (10.2) 0.0 0.0 Pre-tax Profit 612 621 698 787 852 Tax (85.7) (104) (115) (139) (153) Minority Interest (23.5) (22.2) (17.5) (24.6) (25.9) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 503 494 565 624 674 Net Profit before Except. 503 527 576 624 674 EBITDA 847 924 1,127 1,261 1,325 Growth Revenue Gth (%) (2.4) 2.7 17.0 10.4 5.1 EBITDA Gth (%) (6.3) 9.2 22.0 11.9 5.1 Opg Profit Gth (%) (2.1) 8.8 12.2 14.5 6.9 Net Profit Gth (Pre-ex) (%) (6.1) 4.8 9.2 8.4 8.0 Margins & Ratio Gross Margins (%) 20.1 21.0 20.3 21.0 21.0 Opg Profit Margin (%) 8.9 9.4 9.0 9.4 9.5 Net Profit Margin (%) 7.7 7.4 7.2 7.2 7.4 ROAE (%) 22.9 22.2 24.6 25.8 26.1 ROA (%) 6.1 6.3 6.4 6.1 6.5 ROCE (%) 10.7 12.2 11.8 11.0 11.9 Div Payout Ratio (%) 93.2 94.8 82.9 80.1 78.8 Net Interest Cover (x) 32.3 23.4 14.2 10.8 13.0

Source: Company, DBS Bank

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ST Engineering

Quarterly / Interim Income Statement (S$m) FY Dec 3Q2018 4Q2018 1Q2019 2Q2019 3Q2019

Revenue 1,626 1,774 1,731 1,780 2,069 Cost of Goods Sold (1,284) (1,387) (1,383) (1,399) (1,635) Gross Profit 343 387 349 381 433 Other Oper. (Exp)/Inc (188) (235) (197) (216) (249) Operating Profit 154 152 152 165 185 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 9.58 11.6 8.78 12.9 7.02 Net Interest (Exp)/Inc (2.0) (2.8) (0.9) (8.4) (10.5) Exceptional Gain/(Loss) 3.77 0.0 0.0 0.0 (14.2) Pre-tax Profit 166 161 160 170 167 Tax (23.8) (27.3) (26.0) (28.2) (25.1) Provision for arbitration Minority Interest (7.4) (8.8) (2.8) (3.3) (2.6) outcome in marine sector Net Profit 135 124 131 138 139 Net profit bef Except. 131 124 131 138 153 EBITDA 229 227 236 274 291

Growth Revenue Gth (%) (1.5) 9.1 (2.4) 2.8 16.2 EBITDA Gth (%) 1.3 (1.2) 4.3 16.1 5.9 Opg Profit Gth (%) (0.8) (1.8) 0.2 8.6 11.7 Net Profit Gth (Pre-ex) (%) 11.3 (4.8) 5.3 5.4 11.0 Margins Gross Margins (%) 21.1 21.8 20.1 21.4 20.9 Opg Profit Margins (%) 9.5 8.6 8.8 9.3 8.9 Net Profit Margins (%) 8.3 7.0 7.6 7.8 6.7

Balance Sheet (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F Net Fixed Assets 1,719 1,743 1,971 1,872 1,766 Invts in Associates & JVs 448 456 476 497 519 Other LT Assets 1,580 1,277 2,543 2,543 2,543 Cash & ST Invts 999 416 838 758 756 Inventory 2,021 2,254 2,611 2,883 3,031 Debtors 941 1,138 1,306 1,483 1,568 Other Current Assets 315 289 289 289 289 Total Assets 8,024 7,573 10,035 10,326 10,472

ST Debt 222 225 1,775 1,525 1,275 Creditor 1,600 1,830 1,959 2,162 2,273 Other Current Liab 1,766 1,796 1,984 2,141 2,226 LT Debt 894 270 751 751 751 Other LT Liabilities 1,046 917 917 917 917 Shareholder’s Equity 2,215 2,246 2,343 2,499 2,673 Minority Interests 281 288 306 330 356 Total Cap. & Liab. 8,024 7,573 10,035 10,326 10,472

Non-Cash Wkg. Capital (88.8) 55.2 264 353 388 Net Cash/(Debt) (117) (79.6) (1,689) (1,519) (1,270) Debtors Turn (avg days) 67.1 56.6 56.9 58.9 61.2 Creditors Turn (avg days) 121.5 124.0 117.7 116.9 119.4 Inventory Turn (avg days) 143.3 154.6 151.1 155.9 159.3 Asset Turnover (x) 0.8 0.9 0.9 0.8 0.9 Gearing to increase Current Ratio (x) 1.2 1.1 0.9 0.9 1.0 post acquisitions Quick Ratio (x) 0.5 0.4 0.4 0.4 0.4 Net Debt/Equity (X) 0.0 0.0 0.6 0.5 0.4 Net Debt/Equity ex MI (X) 0.1 0.0 0.7 0.6 0.5 Capex to Debt (%) 24.4 67.8 54.7 13.2 14.8 Z-Score (X) 2.3 2.9 2.3 2.3 2.3

Source: Company, DBS Bank

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ST Engineering

Cash Flow Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F

Pre-Tax Profit 612 621 698 787 852 Dep. & Amort. 217 244 369 399 406 Tax Paid (91.7) (99.2) (115) (139) (153) Assoc. & JV Inc/(loss) (49.3) (49.1) (50.0) (51.0) (52.1) Chg in Wkg.Cap. 1.84 (166) (209) (88.5) (35.5) Other Operating CF 74.1 88.8 0.0 0.0 0.0 Net Operating CF 764 639 693 908 1,018 Capital Exp.(net) (273) (336) (1,383) (300) (300) Other Invts.(net) 144 334 0.0 0.0 0.0 Invts in Assoc. & JV (85.8) (34.3) (5.0) (5.0) (5.0) Div from Assoc & JV 81.0 61.1 35.0 35.0 35.0 Other Investing CF (113) (90.0) (481) 0.0 0.0 Net Investing CF (246) (65.2) (1,834) (270) (270) Div Paid (468) (468) (468) (468) (500) Chg in Gross Debt 127 (636) 2,031 (250) (250) Capital Issues 9.17 (4.4) 0.0 0.0 0.0 Other Financing CF (57.7) (53.2) 0.0 0.0 0.0 Net Financing CF (389) (1,161) 1,563 (718) (750) Currency Adjustments (34.3) 3.87 0.0 0.0 0.0 Chg in Cash 94.1 (583) 422 (80.3) (1.2) Opg CFPS (S cts) 24.4 25.8 28.9 31.9 33.8 Free CFPS (S cts) 15.7 9.72 (22.1) 19.5 23.0 Source: Company, DBS Bank

Target Price & Ratings History

S$ 4.44 12-m th Date of Clos ing S .No. Target Rating Report Price Price 4.24 1: 15 Nov 18 3.54 4.15 BUY 6 2: 22 Feb 19 3.73 4.15 BUY 4.04 3: 29 Mar 19 3.74 4.15 BUY 4 4: 25 Apr 19 3.89 4.15 BUY 3.84 2 5 5: 16 May 19 4.00 4.50 BUY 6: 15 Aug 19 4.07 4.64 BUY 3.64 3

3.44 1

3.24 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep -1 9 Nov-19

Note : S hare price and T arget price are adjus ted for corporate actions .

Source: DBS Bank Analyst: Suvro SARKAR Jason SUM

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ST Engineering

^ Bloomberg ESG Disclosure Scores rate companies annually based on their disclosure of quantitative and policy-related ESG data. It is based on a scoring scale of 0-100, and calculated using a subset of more than 100 raw data points it collects on ESG. It is designed to measure the robustness of companies' disclosure of ESG information in their reporting/the public domain. Based on Bloomberg disclosures, as of 25 Jan 2019, the global ESG disclosure average score is 24.92 and 22.14, 28.26, 49.97 for Environmental, Social and Governance, respectively.

DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends

Completed Date: 12 Nov 2019 09:11:03 (SGT) Dissemination Date: 12 Nov 2019 09:17:30 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

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(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary position in ST Engineering recommended in this report as of 31 Oct 2019 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Directorship/trustee interests: 4. Sim S. LIM, a member of DBS Group Mgt Committee, is a Independent non-executive director of ST Engineering as of 1 Oct 2019.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Disclosure of previous investment recommendation produced: 5. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.

DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.

Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

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Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.

United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, International Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated Financial by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the Centre DFSA rulebook) and no other person may act upon it.

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as Emirates defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

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DBS Regional Research Offices

HONG KONG MALAYSIA SINGAPORE DBS (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

THAILAND INDONESIA DBS Vickers Securities (Thailand) Co Ltd PT DBS Vickers Sekuritas (Indonesia) Contact: Chanpen Sirithanarattanakul Contact: Maynard Priajaya Arif 989 Siam Piwat Tower Building, DBS Bank Tower 9th, 14th-15th Floor Ciputra World 1, 32/F Rama 1 Road, Pathumwan, Jl. Prof. Dr. Satrio Kav. 3-5 Bangkok Thailand 10330 Jakarta 12940, Indonesia Tel. 66 2 857 7831 Tel: 62 21 3003 4900 Fax: 66 2 658 1269 Fax: 6221 3003 4943 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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