ST Engineering - CIMB Research 2015-11-06: Broad-based structural headwinds

ST Engineering - CIMB Research 2015-11-06: Broad-based structural headwinds ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering - Broad-based structural headwinds 

  • STE’s earnings met expectations, with 9M15 forming 71% of our FY15F and 73% of consensus. Higher interest income and lower tax rate helped the quarter. 
  • Aerospace was hit by more provisions for B757 delays, and management guided for more provisions related to stock obsolescence for rotable parts in 4Q15. 
  • It changed its FY15 PBT guidance from ‘comparable’ yoy to ‘lower’ yoy, mainly due to Electronics and worsened Marine. 
  • We cut our EPS by 7-10% to account for slower growth across segments. Our target price is cut to S$3.33, based on blended 18x CY17 P/E, DCF and dividend yield. 

Aerospace: a long wait till 2017/18 

  • Aerospace’s 3Q15 PBT of S$63m (-10%qoq) was hit by provisions for liquidated damages for B757 PTF delay and doubtful debts for Russian airline, Transaero. The low oil price led to longer flying hours and lesser checks in the US during summer. Maintenance programmes were also deferred as customers’ aircraft were replaced by new platforms. 
  • Management expects more provisions for rotable parts in 4Q15. 
  • Engine overhaul cycle is pushed back to 2017/18 from 2H15/16 due to better durability. 

Electronics: projects shift to the right 

  • Electronics’ 3Q15 PBT of S$49m (+5% yoy, +6% qoq) was in line. However, management toned down the guidance for a ‘better’ FY15 vs. FY14 to ‘comparable’, although it still expects revenue to be ‘higher’. This is due to the deferral of high-margin projects – IMMARSAT’s satellite contracts is deferred from 2H15 to 2016 on progressive basis. 
  • The division is still a contender for ERP2 which is likely to be awarded by 1H16. 

Marine: completed large defense contracts, worse years ahead 

  • 3Q15 PBT of S$16m (-51% yoy, -46% qoq) missed our forecast. Shipbuilding revenue fell 49% yoy and 23% qoq to S$135m due to the completion of Oman Navy patrol vessels and deferral of some projects. 
  • In addition, we believe there were further provisions for the Pasha project (delivered in Apr-15), which is still under warranty. 
  • Ship repair workload also dropped, coinciding with the weak offshore market. 
  • Earnings will deteriorate into 2017 with no commercial contracts in sight, in our view. 

Land systems: still weary of China and Brazil’s economies 

  • Land system’s 3Q15 PBT of S$20m (+9% yoy, +22% qoq) was stable. Provisions for stock obsolescence fell due to provision write-backs as some stocks were sold. However, we believe provisions of S$6m-9m/quarter will be a more sustainable level. 
  • The construction vehicles markets in China and Brazil may still deteriorate while the pick-up in India is slower than expected. Unless the US housing market outperforms, we think Land Systems’ earnings may still be under pressure in 2016. 

Downgrade from Add to Hold 

  • STE is facing headwinds in three out of its four segments: aerospace is battling with better quality aircraft and engines, marine faces a shipbuilding order drought, and land systems is facing a drag in China and Brazil. However, order momentum is still decent in aerospace (S$1.7bn YTD) and electronics (S$1.1bn). 
  • Order book was at S$12.2bn, with net cash of c.S$600m (incl. cash in investments). Dividend yield of c.4.3% is still decent.

LIM Siew Khee CIMB Securities | 2015-11-06
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 3.33 Down 3.70