ST Engineering - Maybank Kim Eng 2016-02-26: Too Cheap to Ignore

ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering (STE SP) - Too Cheap to Ignore

FY15 EPS beat, at 106% of our FY15F.
We trim TP to SGD3.47 from SGD3.60, still at 20x FY16 EPS, after cutting FY16/17 EPS for lower Land Systems earnings.
We continue to believe that the MRO sector is near a bottom and could rebound in the next 1-2 years.

As a major MRO service provider, STE should profit from the next up cycle.
Stock trades at the low end of its 10-year P/E range of 16x, which we think is unjustified.
Yields are 5%. Maintain BUY.

FY15 net income of SGD529m (-0.5% YoY) beat our SGD495m and guidance of lower profits.
While positive, earnings quality was nothing to shout about. This was because 4Q15 was supported by negative goodwill for its acquisition of the remaining 50% of an aerospace unit of SGD10.5m.
STE maintained its 15 SGD cts DPS and 88% payout, although it continues to guide for a sustainable 75-80%.
Management expects higher revenue and comparable PBT for 2016.

We think there could be upside to guidance of higher revenue, but comparable PBT for the Aerospace division.
During its analysts’ briefing, STE guides that revenue may be higher from the consolidation of EADS EFW. This recently became a 55% subsidiary after its stake was raised from 35%. Stripping that out, it expects flat Aerospace revenue.
We think this is conservative, as persistently low oil prices have vastly improved the economics of flying older aircraft. We expect this to fuel a pick-up in MRO work in the next 1-2 years and build in higher Aerospace PBT.

Captured In Forecasts On the other hand, we expect a lack of contracts in recent years to weigh on Marine earnings. This, however, has been captured in our forecasts.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-26

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.47 Down 3.60