Maybank Kim Eng 2015-08-14: ST Engineering - Position for 2016 Rebound; Upgrade to BUY.

SINGAPORE TECH ENGINEERING LTD S63.SI

Position for 2016 Rebound; U/G

2Q15 in line. Guidance maintained. No change to EPS.
Beneficiary of USD strength. Aerospace to pick up as global airlines accelerate capacity & slow fleet retirement.
Upgrade to BUY from HOLD with catalysts expected from 2016 rebound. Raise TP to SGD3.85 from SGD3.45 after rollover to FY16, still at 18x EPS.

2Q15 net income of SGD125m (-6.6% YoY) was in line, with 1H at 45% of our FY15F.

Its performance would have been stronger if not for SGD6.5m in provision for vehicle stock obsolescence and another SGD4m in goodwill impairment for its commercial vehicle sales business in Brazil under the Land Systems division.
Interim DPS was raised by 1.0 SGD cts to 5.0 SGD cts. 2H15 is expected to be stronger due to the absence of one-off losses in the comparable period last year and is backed by SGD2.3b of orders that are expected to be delivered for the rest of the year.
Management maintained its guidance for comparable sales and PBT in FY15.

USD has strengthened 13% against SGD in the past year.
We see translational gains for STE from its US operations (22% of sales) and net P&L exposure to USD.
Global airlines are likely to accelerate their capacity deployment in response to lower oil prices and slow fleet retirement.
This should eventually lift the maintenance workload for STE’s aerospace division.
We believe the Street has yet to factor in these positives and expect earnings upgrades soon.
Upgrade to BUY from HOLD.
We raise our TP to SGD3.85 from SGD3.45 as we roll over to 18x FY16 EPS, 0.5SD below its 10-year average.
The stock is trading at the low end of its historical P/E range.
Yields remain attractive at 5% even after we build in lower payout ratios, expecting the cash retained to provide more funds for acquisitions.

Derrick Heng CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-08-14

BUY Upgrade HOLD 3.85 Up 3.45