ST Engineering - OCBC Investment 2015-11-06: Cut To HOLD on Softer Outlook

ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Cut To HOLD on Softer Outlook

 Lower FY15 PBT guidance

 S$12.2b order book on hand

 Yield of 3.9% expected

Singapore Technologies Engineering (STE) reported its 3Q15 results this morning, with revenue down 3% YoY at S$1500.0m, mainly dragged down by Marine (down 39% to S$205m), but mitigated somewhat by Electronics (+21% to S$429m).

Still, PBT grew 2% to S$154.7m, in line with management’s “comparable” guidance.
Reported net profit climbed 10% to S$133.3m, but we estimate that core earnings likely fell 3% to S$147.2m, after excluding forex and other one-off items.
9M15 revenue slipped 3% to S$4556.4m, meeting just 68% of our FY15 forecast, while PBT fell 4% to S$463.7m; net profit eased 1% to S$388.2m, or about 71% of our full-year forecast.

Like the past few quarters, its Marine segment has underperformed, dropping 39% in terms of top line due to lower Shipbuilding revenue and less Shiprepair activities from both local and US operations.
Even more concerning is the 51% fall in its PBT to just S$15.9m in 3Q15. Outlook is likely to remain muted, with STE keeping its earlier guidance for both FY15 revenue and PBT to be lower than that of FY14.

In addition to the Marine sector, STE also sees a weak market outlook impacting the aerospace maintenance, repair and overhaul business; this resulting in a comparable 2H15 PBT to 1H15, versus higher previously.
For the full-year, STE expects overall revenue to be comparable to FY14, but it has lowered its FY15 PBT guidance from “comparable” to lower. However, management highlights that it is still sitting on an order book of S$12.2b; and expects to deliver about S$1.4b in 4Q15.

In view of the soft 3Q15 numbers as well as lower guidance, we are shaving 4% off both our FY15 revenue and earnings estimates (down 5% and 3% for FY16 respectively). Hence even as we shift our 19x valuation from blended FY15/16 to FY16F EPS, our fair value dips from S$3.33 to S$3.22.
We also downgrade our call from Buy to HOLD; note STE remains committed to paying out at least 75% of its earnings as dividend, which should translate to a yield of 3.9%.

Carey Wong OCBC Securities | http://www.ocbcresearch.com/ 2015-11-06

OCBC Securities SGX Stock Analyst Report HOLD Downgrade BUY 3.22 Down 3.33