ST Engineering - Maybank Kim Eng 2016-05-13: Disappointing Start to the Year

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ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering (STE SP) - Disappointing Start to the Year

1Q16 missed expectations; D/G to HOLD

• 1Q16 missed expectations due to a surprise loss at its shipbuilding business. 
• While we continue to expect better profits from its aerospace division, the magnitude of a rebound may be smaller than expected. 
• Coupled with the difficult outlook for marine, we expect another year of sub-par returns. We cut EPS by 6-8% and lower our TP to SGD3.17 (from SGD3.47). 
• Our revised TP is based on 18x FY17E P/E (from 20x FY16E), 0.5 SD below historical average to reflect our expectations of lower returns in the near term. 
• Downgrade to HOLD.

Surprise loss at shipbuilding; Rationalising specialty vehicle business in China

• 1Q16 below on surprise losses at its shipbuilding segment. While softer marine performance was expected from the sector headwinds, we were surprised by the magnitude of weakness. 
• Its shipbuilding arm reported losses of SGD11m. It is unclear to us if this unit can report a significant earnings rebound in the near term. However, we see the recent sale of its 60% stake in GJK as a positive move as this specialty vehicle business in China has underperformed for years.

Not quite a swift rebound in Aerospace

• We continue to expect better profits for its Aerospace business, but believe that the magnitude of rebound may be smaller than earlier expected. 
• Persistently low oil prices have improved the economics of operating older aircraft. However, the airline industry has not increased their use of older aircraft in a significant manner yet. Hence, our original expectation of a significant rebound in MRO workload from this phenomenon is unlikely to materialise soon.

Not easy to achieve profit guidance

• Despite the soft start to the year, management maintained its guidance for higher revenue and comparable PBT for FY16 to that of FY15. 
• We believe this is not easy to achieve given the current headwinds and see potential for disappointment at its mid-year review.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-13

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