ST Engineering - Maybank Kim Eng 2015-11-06: Cyclical Upturn Still Within Sight

ST Engineering - Maybank Kim Eng 2015-11-06: Cyclical Upturn Still Within Sight ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering - Cyclical Upturn Still Within Sight 

  • 3Q15 missed, with 9M15 at 68.8% of our FY15F. 
  • Blamed on prolonged softness in aerospace & weak shipbuilding. Guidance cut to lower YoY PBT for 2015. We cut EPS by 11-16% for this & lower marine contributions. 
  • TP down 6% to SGD3.60, based on 20x FY16 P/E (10-year average), in view of stronger FY17 growth expected. Maintain BUY for potential rebound in aircraft MRO work. 

Guidance cut 

  • 3Q15 net income of SGD133.3m (+9.9% YoY, +6.6% QoQ) missed, with 9M at just 68.8% of our FY15F. 
  • Expectations of a stronger 2H15 did not materialise, attributed to prolonged softness in its aerospace MRO business and shipbuilding weakness. 
  • Group order backlog dwindled to SGD12.2b from SGD12.4b in 2Q15. 
  • Management cut its guidance and now expects 2015 PBT to be lower YoY, from its earlier guidance of a flat year and reiterates its intention for sustainable dividend payout of 75-80%. 

We cut EPS; Marine could stay weak 

  • We cut our FY15-17 EPS by 12%/16%/11% to reflect the above as well as lower marine contributions given a lack of new orders. 
  • Margins have also been cut across the board as cost pressure persists. 

BUY ahead of cyclical upturn 

  • While our new forecasts imply a smaller EPS rebound next year, we believe that a cyclical rebound in aircraft maintenance workload remains in the works. 
  • Airlines are likely to increase capacity in response to lower oil prices and slow down their fleet retirement. These should drive a pick-up in maintenance workloads. 
  • We shave our TP from SGD3.85 to SGD3.60, based on 20x FY16 EPS, the 10- year P/E mean. 
  • This is in view of expectations for higher EPS growth in FY17. 
  • Maintain BUY.

Derrick Heng CFA Maybank Kim Eng | 2015-11-06
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.60 Down 3.85