Where next for ST Engineering shares following new coronavirus guidance?

Singapore technology, defence and engineering group Singapore Technologies (ST) Engineering on Tuesday 14 April 2020 issued an update regarding the coronavirus pandemic’s impact on its operations.

A day after the guidance, ST Engineering’s share price fell as much 3.2%. As at 11.45am on Thursday 16 April, STE shares are trading at S$3.42 per share, based on IG trading data.

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ST Engineering to continue a majority of essential operations

On 07 April 2020, the Covid-19 (Temporary Measures) (Control Order) Regulations 2020 were passed in Singapore. Under these regulations, all workplace premises must be closed for the period 07 April 2020 through 04 May 2020 (inclusive), except for entities which provide essential services can continue to operate with minimum staff.

The group stated in this newest announcement that the main company and many of its subsidiaries – including those in aerospace, marine, automotive and electronics – have been classified as a provider of essential services. As such, it will continue to be able to operate from the relevant premises during this period.

In the US, many states have required their residents to observe ‘Shelter in Place’ orders in the past weeks. Nevertheless, the group’s subsidiaries in the US will also continue to operate as essential businesses with the necessary safeguards including safe-distancing measures and telecommuting arrangements.

Read also: ST Engineering's share price soars post-2019 earnings

ST Engineering provides optimistic financial guidance

The group also provided a seemingly positive guidance regarding the coronavirus’ impact on its businesses, stating that its balance sheet is still looking ‘strong’.

It stated that ‘a diverse business portfolio’, covering defence and various domains in the aerospace, electronics, land systems and marine sectors, allows it to mitigate the overall impact on its various entities.

If further added that it is ‘closely monitoring the rapidly evolving nature of the pandemic’, and that it is in ‘constant dialogue with its customers and suppliers to adjust delivery schedules and/or address disruptions in the supply chains’.

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In the meantime, the company said that it has embarked on a group-wide efficiency and cost reduction initiative, while also ramping up investments in improving processes and skills upgrading with an aim to emerge stronger when the pandemic ends.

Finally, the rating agencies of Standard & Poor’s and Moody’s also maintained ST Engineering’s credit rating at AAA/Stable and Aaa/Stable in their recently published credit opinions on 18 March 2020 and 09 April 2020 respectively.

Changes to ST Engineering’s Board of Directors

To provide more financial cushion, the group’s Board of Directors has decided to reduce Board fees by 10%. The President and CEO will also reduce his salary by 10%, while the senior management team will reduce their salaries by percentages ranging between 5% and 10%. These changes will take effect from 01 May 2020.

In a separate announcement posted on the same day, the company revealed that Dr Beh Swan Gin will be retiring as an independent non-executive Director of the company at the upcoming 23rd Annual General Meeting (AGM), and will not be seeking re-election.

ST Engineering had previously announced that the AGM, which was originally scheduled for 23 April 2020, would be deferred to a future date that is still to be determined, due to the Covid-19 situation.

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What to expect next from ST Engineering’s share price

Just prior to this update, UOB analyst K Ajith had named ST Engineering as his choice stock pick, stating that he sees ‘underlying value’ in the equity.

He cited the fact that one-third of STE's business is defence-related and so will be largely unaffected by the pandemic crisis.

‘After factoring in a 50% reduction in aerospace maintenance revenue for 2Q20 and 3Q20, we only expect a 12% year-on-year decline in net profit for the year,’ he wrote in a note.

He also estimates that the latest wage cost-support measures announced by the Singapore government will lead to S$45 million to S$48 million in cost savings for ST Engineering in 2020. This will equate to roughly 8% of 2019's earnings.

Finally, Ajith sees incremental contract wins in the next six to 12 months as future share price catalysts. On that note, he maintains a ‘buy’ on the ST Engineering stock alongside a 12-month price target of S$4.46 per share.

Are you bullish or bearish on ST Engineering? Either way, you can buy long or sell short on STE shares and other Singapore stocks using CFDs and other instruments offered on IG's world-leading trading platform. Start today by opening an IG account.