ST Engineering - CIMB Research 2016-05-13: Budding growth

ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Budding growth

1Q16 net profit of S$110m (US$85m) was broadly in line, at 21% of our FY16F and consensus. Expect a stronger 2Q16 to meet guided comparable yoy 1H16.
STE is a story of MRO recovery and spending in cyber security/smart nations.
Land system is set to turn around after its recent exit from the unprofitable excavator business in China. This leaves marine as the only problem child (3% of 1Q16 PBT).
Raise our FY17-18F EPS by 1-2% on stronger revenue growth in aerospace and electronics, offset by marine. SOP-based target price lifted to S$3.32

Maintain Add. Stronger-than-expected earnings growth could be a key catalyst

Revenue rose 27% yoy and 7% qoq as the consolidation of its 55% stake in German EFW (exclusive composite panels supplier to Airbus) expanded Aero engineering workload. Aero PBT (58% of total) rose 5% yoy mainly due to aircraft maintenance & modification in China and the US.
Associates STARCO and STAG in China had stronger baseload, benefiting from the fleet expansion trend in Asia. No B737s were parted out in 1Q16, suggesting airlines are flying older aircraft, milking low oil prices.
Lower PBT margin of 12% could reflect EFW’s high cost and lower pricing in China.

Electronics (Elec) accounted for 30% of STE’s PBT. The increasing trend in smart nations, and cyber security spending among government bodies in Singapore and the region will sustain Elec’s 1Q16 order win of S$500m in the subsequent quarters.
Elec’s capabilities in command and control, system integration and success in launching new satellite and communications products in the US and Singapore are likely to be the key in generating c.10% annual growth in PBT.

Land system’s (land) losses in automotive narrowed to S$0.9m (US$0.6m) in 1Q16 (4Q15: -S$8m) as the group managed to scrub clean the construction vehicles business in China. We expect automotive to turn around as land system recently divested its loss making excavator business (GJK) in China for Rmb200m (US$31m) with a small gain in 2H16 upon approval by authorities.
JHK is a smaller outfit that remains in China, specialising in excavators, which will also be divested when the valuations improve.

Marine’s shipbuilding turned in its first loss of S$11m (US$8m) since 4Q08, hurt by provisions for additional costs for its Crowley Con-Ro projects (contracted in 4Q13 at c.US$350m) in the US due to new product learning curve.
We forecast 6-18% decline in profit in FY16-17F on the back of challenging oil & gas sector.
Cost cutting measures have kicked in as indirect costs were down S$6m (US$4m) yoy, but they were insufficient to offset the significant weakness in revenue, in our view.

Relative to other Singapore conglomerates, STE’s consistent order wins, strong balance sheet with earnings growth warrant its premium valuation.
It benefits from MRO recovery and heightened governmental electronics spending, with the wild card from defence contracts.
Order book stood at S$11.5bn.
Our new target price (S$3.32) is still based on SOP, comprised of 19.5x P/E (previously 18x) on better outlook across aero, elec and land.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-05-13

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