ST Engineering - DBS Research 2016-05-16: Orderbook remains robust

ST Engineering - DBS Research 2016-05-16: Orderbook remains robust ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering - Orderbook remains robust

  • 1Q16 core profits in line; headline PBT affected by one-off items
  • Revenues boosted by Aerospace initiatives
  • Orderbook of S$11.5bn remains healthy



Maintain BUY; investment thesis intact. 

  • ST Engineering remains a defensive stock with a healthy balance sheet and secure dividend payouts amidst a volatile equity market. 
  • Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few. 
  • The Electronics segment should also benefit from the ‘Smart City’ trend, which could open up a US$400-500bn market by 2020.


1Q16 core profits in line; orderbook healthy. 

  • Headline profits before tax (PBT) for 1Q16 came in at S$130m, down 13% y-o- y and 22% q-o-q, but this was skewed by one-off items including fair value gains, Singapore Airshow expenses and provisions on US shipbuilding contracts, without which we think the Group would have achieved a ~S$160-165m PBT.


Tweaking forecasts on EFW consolidation and near-term margin pressures. 

  • We adjust our revenues upward by 2% each in FY16 and FY17 mainly to account for the consolidation of subsidiary EFW after ST Aerospace increased its stake to 55%. 
  • Profits are revised down by 6%/4% in FY16/FY17 due to margin pressures at the Marine segment (poor US shipbuilding performance), Electronics segment (higher R&D and marketing for new products) and Aerospace segment (as new businesses ramp up operations).


Valuation:

  • Our TP is adjusted to S$3.55 following the cut in earnings. The TP is based on a blended valuation framework to factor in both earnings growth and cash-generative nature of the business.


Key Risks to Our View:

  • The structural changes facing the aircraft MRO industry could hit harder than expected, as newer airframe and engines reduce maintenance spend and lengthen the cycle for checks and OEMs take a larger share of the aftermarket services. 
  • Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.




Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-05-16
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.55 Down 3.65


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