ST Engineering - DBS Research 2016-11-10: Earnings should rebound in FY17

ST Engineering - DBS Vickers 2016-11-10: Earnings should rebound in FY17 SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Earnings should rebound in FY17

  • 3Q16 core earnings in line with expectations.
  • Exit from Chinese specialty vehicle business removes a significant drag on earnings.
  • FY16 dividends likely to be maintained at 15 Scts.


Maintain BUY; good entry point. 

  • ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts, and the recent share price retreat creates a better entry point for the stock now. 
  • Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few. 
  • The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but various overseas markets as well.


3Q16 earnings in line, excluding one-off writedowns. 

  • STE reported headline net profit of S$76.7m, but excluding S$61.1m in one-off writedowns and closure costs related to its Chinese specialty vehicles subsidiary that has ceased operations, 3Q16 core net profit of S$137.8m (up 3% y-o-y, 8% q-o-q) was within expectations. 
  • Orderbook remained flattish at S$11.4bn.


Core forecasts unchanged, no impact to dividends from one-off items. 

  • We lower our FY16 headline net profit estimate by 12% to account for the one-off items recorded in 3Q16, but our core estimates remain unchanged for FY16/17. We expect a reasonable earnings rebound in FY17, following a kitchensinking year in FY16 associated with a management transition.
  • Cessation of losses at the Chinese specialty vehicle subsidiaries, coupled with continued growth at Electronics division, should help offset weakness at the Marine division in FY17. 
  • We believe dividends in FY16/17 should be maintained at 15 Scts, notwithstanding the one-off earnings impact in FY16.

Valuation

  • Our TP is adjusted slightly to S$3.50 as we roll over to FY17 numbers. 
  • Our TP is based on a blended valuation framework to factor in both earnings growth and long-term cash-generative nature of the business.

Key Risks to Our View

  • A protracted slowdown in the shipbuilding and commercial vehicle businesses could hurt prospects, unless STE can offer niche products or streamline operations quickly. 
  • Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.




Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-10
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.50 Down 3.550




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