ST Engineering - Strong order pipeline
- FY16 net profit of S$484m slightly above expectations at 109% of our FY16F on lower tax. All divisions except marine achieved stronger qoq growth.
- Final dividend of S$0.10 as expected, bringing total dividend for FY16 to S$0.15
- ST Engineering (STE) is a company with decent earnings growth and yield. Earnings visibility sustained by its S$11.6bn order book with S$5.2bn order wins in 2016.
- Maintain Add with higher target price of S$3.82, still on blended valuations (22x P/E, DCF and dividend yield).
- Stronger earnings growth a key potential re-rating catalyst.
Marine and “others” the outliers
- STE’s 4Q16 PBT grew 10% yoy and 72% qoq to $183m. All divisions posted qoq improvement except marine (S$2.8m loss) due to lower shipbuilding revenue and variation order for a project in the US (to be recognised in 1Q17).
- Loss in “others” narrowed to S$3m (3Q16: S$9m loss), thanks to upward price adjustment on a major product in VT Miltope US (specialised in rugged computer).
- Management targets to turn the division around in FY17. On a breakeven scenario, “others” could add 2% to PBT.
We expect S$2.5bn of electronics contracts in FY17F
- Electronics could be the star in the era of smart nation and focus on infocom technology (ICT) and cyber security. STE has the advantage, given its track record with government enterprises locally and overseas.
- Electronics clinched S$2.3bn (+43% yoy) of contracts in FY16, of which S$1.6bn (+49% yoy) were from advanced electronics ICT. Order momentum could continue in 2017 as it is in a structural sweet spot of heightened demand for data analytics, machine-to-machine communications and urbanisation trend.
+90% yoy growth in land systems PBT
- With no losses from China, land systems 4Q16 PBT rose to S$24m (+90% yoy).
- Contribution from the US rose from 22% in FY15 to 27% in FY16, driven by sales of F&B trucks and road construction vehicles. 4Q16 US sales rose 16% yoy, thanks to stronger US$, and infrastructure and consumer spending post presidential elections.
- STE was shortlisted with six contenders to prototype next-generation vehicles for the US Postal Service.
- Contract size is up to US$4.5bn-6.3bn for c.180,000 mail trucks by 2018/2019.
Marine hopeful for defence orders
- FY16 marine PBT of S$75m was in line with our expectations. The losses in 4Q16 in shipbuilding was a miss (we expected slight profit), buffeted by higher ship-repair.
- Management expects the division to deliver comparable revenue but lower PBT in 2017 on conservative expectations that margins for newbuilds are competitive. It won S$138m of contracts in 4Q16 comprising some para-defence jobs. Order enquiries have been better than management’s expectations, mainly from the defence industry.
Aero gaining market share in airframe
- Aerospace 4Q16 PBT grew 32% qoq and 1% yoy to S$86m, helped by higher milestone completion of projects in engineering & materials services.
- Management is seeing improving enquiries on components and engines as the industry expects recovery from 2018 and peak demand in 2020.
- Relatively low oil prices and higher interest rates have kept the retiring of old fleet at a slow pace. This could still sustain demand for airframe MRO.
- Aerospace has also seen its market share by manhours increased yoy.
Maintain Add and raise TP to S$3.82
- We lift our FY17-18F EPS by 1-3% to reflect better land systems performance.
- Key risk to our call is a sudden plunge in the US economy.