ST Engineering - Riding on new growth areas
- FY16 core net profit higher than estimates; expect FY17 growth to be driven by Electronics segment.
- Final dividend of 10Scts declared, bringing full-year DPS to 15Scts (in-line); healthy yield of 4.4%.
- Stronger order wins in FY16 augurs well for future.
Maintain BUY; we like the continued progress with Smart City.
- ST Engineering’s Electronics segment remains well-positioned to tap on the explosive growth of Smart City adoption in the years to come, and we are seeing increased traction in terms of takeup of its products (e.g. management quoted sales of 13 million smart water reader units in the US).
- A rebound in profits at the Land Systems segment post-divestment of the loss-making Chinese specialty vehicle entities should also help the bottomline.
- Higher defense and infrastructure spending in the US, and a potentially stronger US dollar under the Trump administration are also positives for STE, as we believe that most of the Group’s sales into the US originate from facilities based in the US.
- A healthy balance sheet and consistent dividend payout (yielding c.4.4% currently) are also a plus.
Stronger-than-expected FY16; FY16 order wins up 25% y-o-y.
- Excluding the one-off net loss associated with the divestment of the Land Systems’ Chinese subsidiaries GJK and JHK, core net profit was up by 1% y-o-y for the full-year FY16, above our expectations.
- Stronger than expected performance from the Aerospace and Electronics segments in 4Q16, as well as lower tax expense due to adjustments related to previous over-provisions helped to boost the bottomline.
- Full-year order wins grew strongly by c.25% y-o-y to S$5bn, and the orderbook remains healthy at S$11.6bn (c.1.7x book-to-bill ratio). We expect FY17 profits to be higher-y-o-y.
Lifting our earnings estimates higher; still expecting 15Scts DPS in FY17.
- We have adjusted our earnings expectations higher for FY17, primarily reflecting stronger growth assumptions at the Electronics segment.
- Our dividend assumption for FY17 remains unchanged at 15Scts.
- Our TP is adjusted upwards to S$3.80 to factor in the earnings revision. Our TP is based on a blended valuation framework to factor in both earnings growth and long-term cash-generative nature of STE’s businesses.
Key Risks to Our View
- A protracted slowdown in the shipbuilding and execution hiccups at new business segments could detail earnings.
- Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.