ST Engineering - CIMB Research 2015-12-09: Conglomerate pains

ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Conglomerate pains

Structural challenges of new aircraft and engines still prevail.
Share price could trade sideways pending the provisions for stock obsolescence that aerospace may be hit with in 4Q15.
Order drought in marine could drag longer than expected in a low-oil environment
Re-rating catalysts could come from defence /government-related order wins.

Margins could be under pressure as the new 15-pallate PTF conversion goes through a learning curve (first few deliveries in 2016).
In the longer-term, aerospace could face lower maintenance scope and longer interval for heavy checks for new generation aircraft like the B737NG and A320neo.
Better durability of the CFM engines is also pushing back the overhaul cycle to 2017/18.

We do not expect the commercial offshore capex to recover in the near term on the back of a low oil price environment.
In addition, defence contracts are taking longer to come to fruition which could put pressure on its operating leverage in the US and Singapore yards.
Earnings gap in marine could be bigger-than-expected if no contracts are secured in the next 12 months. The division has not won any major contracts since 2014.

Since 3Q13, STE has been hit by various events –contract award delays, impairment charges, restructuring, provisions for stock obsolescence, doubtful debts and cost overruns, mainly in the aerospace and marine sectors.
The endless negative surprises could be a long-term derating catalyst and multiple reversions to +1s.d trading band of 20-21x is unlikely in the near-term, especially on the back of lackluster earnings growth.

Electronics is the key growth driver, supported by demand for infor-com, mass-rapid train infrastructure. satellite and homeland security spending by government agencies. STE is still contending for the ERP2 contract which is likely to be announced in 2016.
We believe the project size, including maintenance contracts could amount to S$800m- 1bn.

Relative to other conglomerates in Singapore (KEP and SCI), STE’s order book of S$12.2bn is secured mainly from long-term contracts which are less susceptible to cancellations.
Order win is still decent: aerospace and electronics have secured S$1.7bn and S$1.1bn of orders YTD.
We believe the momentum is likely to continue in FY16.
Dividend yield is attractive, backed by net cash of c.S$600m (incl. cash in investments).
Our target price of S$3.33 is intact, still based on blended 18x CY17 P/E, DCF and dividend yield.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-12-09

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