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

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 

Maintain BUY; MRO Close to a Bottom 

  • 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 Beat; Stable DPS 

  • 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. 

Aerospace Has Upside Potential 

  • 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. 

Marine Weakness 

  • 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 | 2016-02-26
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.47 Down 3.60