ST Engineering - OCBC Investment 2016-04-27: Downgrade to HOLD on valuation

ST Engineering - OCBC Investment 2016-04-27: Downgrade to HOLD on valuation ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering: Downgrade to HOLD on valuation 

  • Total orders of S$948m won so far 
  • Order book of S$11.2b; S$3.8b due in FY16 
  • Valuations are not compelling; downgrade to HOLD 

Electronics arm won S$505m in 1Q16 

  • Singapore Technologies Engineering (STE) recently announced that it has won about S$505m worth of contracts in 1Q16 for Rail Electronics & Intelligent Transport (S$41m), Satellite & Broadband Communications (S$91m), and Advanced Electronics & Information Communications Technologies solutions (S$373m). 
  • However, these contracts are not expected to have any material impact on FY16’s NTA or EPS; but it is an improvement over S$435m worth of Electronics orders STE had won in 4Q15. 
  • Earlier, STE announced that it has secured about S$443m worth of Aerospace orders in 1Q16, versus S$415m won in 4Q15; but it did not give specific breakdown, other than saying these include the previously announced VIP aircraft interiors contracts, and the four pilot training contracts awarded by the various airlines. 

Order book was S$11.7b as of end 2015 

  • Cumulatively, STE has secured about S$948m worth of new contracts in 1Q16 (yet to announce contract wins for its Marine division, but as a guide, it had won S$344m of Marine orders in 4Q15), which compares favorably against the S$1.2b total orders it had won in 4Q15. 
  • As of end 2015, STE has an order book of around S$11.7b, which it expects to deliver about S$3.8b this year, covering about 60% of our full- year estimate. 
  • STE is due to release its 1Q16 results on 13 May (before market); it had previously guided for higher group revenue in FY16, but comparable PBT, suggesting that there may be risk of a margin squeeze. 

Strong run-up after FY15 results 

  • Meanwhile, STE has also seen a pretty strong run-up in its share price after releasing an in-line set of FY15 results on 26 Feb; the stock hit an intraday high of S$3.37 on 21 Apr, or a gain of 20%. However, the run-up has also exceeded our target price of S$3.24. 
  • While the stock price has corrected somewhat, we believe that valuations are not compelling enough; the company’s PER is still trading above its 3-year mean of 19x consensus EPS. Hence we opt to downgrade our Buy call to HOLD. 
  • We would be looking to re-engage closer to S$3.00.

Carey Wong OCBC Securities | 2016-04-27
OCBC Securities SGX Stock Analyst Report HOLD Downgrade BUY 3.24 Same 3.24