ST Engineering - CIMB Research 2016-02-29: Safer refuge

ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Safer refuge

FY15 net profit of S$529m (-1% yoy) at 105% of our forecast. Total DPS of S$0.15 (88% payout); 5.3% yield.
Land Systems was the positive outlier. Marine was not as bad as expected.
Structural headwinds in MRO could be muffled by low-oil price and high-interest rates as airlines slow down aircraft retirement and defer delivery.

Upgrade from Hold to Add; valuations starting to look attractive at -1.s.d. of its 7- year mean against steady earnings.

Aerospace’s 4Q15 PBT of S$85m (+35% qoq, +19% yoy) included S$10.6m of negative goodwill from higher stake in associate S-Pro but offset by a S$21m (FY14: S$40m) stock provision. The seasonally strong 4Q included delivery of 15-pallate PTF conversions and VIP project.
MRO demand should remain steady as higher profitability (low oil price) among airlines could spur cabin retrofits.
Retirement of old aircraft is also slowing (stocks provisions have halved yoy).
Low-oil and high-interest rates could buffer the industry headwinds of MRO being threatened by new-gen aircraft.

Electronics’ 4Q15 PBT of S$60m (+22% qoq, +7% yoy) was lifted by higher sales from iDirect on the back of new launches. Management expects pressure on margins for new products.
The loss of ERP2 to the NCS-Mitsubishi consortium was disappointing. NCS’s S$556m bid (vs. STE’s S$1.26bn) may not have included long-term maintenance. Management expects comparable profit in FY16.

Marine’s 4Q15 PBT of S$19m (+21% qoq, -43% yoy) was in line. Engineering division incurred S$3.5m loss due to costs to lift Ropax (passenger vessel previously cancelled) chartered out to a default customer. The division should do better in FY16 as its new charter rate is higher.
There is still work in Marine as it won S$344m of orders in 4Q15 (mainly upgrades/repairs of naval and commercial vessels).
We expect an 18% yoy cut in FY16 earnings on weaker shipbuilding revenue and PBT margin (0.5%).

4Q15 land systems PBT of S$12.7m (-36% qoq, +>100% yoy) above our expectation due to higher revenue from US automotive, and munitions & weapon.
Automotive lost S$7.7m in 4Q15 due to R&D expensed in China for a new product in the defence and specialty vehicles segments. The construction vehicle markets in China and Brazil continue to be challenging but this could be offset by the stronger housing US market.
Management guided for comparable revenue but lower FY16 profit.

Valuation is starting to look attractive.
We cut our FY16-17 EPS forecasts by 1-5% to reflect lower profits in Land and Marine. Our SOP target price is reduced to S$3.17.
While peers are suffering from tight gearing and customer default risks, STE’s net cash of S$1.4bn (incl. bonds) offers a safer refuge with a c.80 % dividend payout.
Catalysts could come from stronger growth across segments.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-02-29

CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 3.17 Down 3.33