ST Engineering - OCBC Investment 2016-05-16: Valuations attractive again; upgrade to BUY

ST Engineering - OCBC Investment 2016-05-16: Valuations attractive again; upgrade to BUY ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering: Valuations attractive again; upgrade to BUY 

  • 1H PBT to be lower YoY 
  • But 2H recovery seems likely 
  • Valuations more attractive; potential 11% total return 

1Q16 earnings tracking below forecast 

  • Singapore Technologies Engineering (STE) reported its 1Q16 revenue of S$1,627.1m (+8% YoY), in line with our forecast (meeting 25% of FY16 estimate); STE saw higher revenue from Aerospace (+27%) and Electronics (+28%), but mitigated by lower revenue from Land Systems (-18%) and Marine (-24%). 
  • However, PBT slipped 13% to S$130.4m and PATMI dropped 15% to S$110.2m, both meeting 21% of our full-year forecasts, hence slightly weaker than expected; PBT for Aerospace was comparable and Electronics +13%, but Land Systems dropped 28% and Marine tumbled 85%. 

Outlook remains cautious; 1H PBT likely lower 

  • With the uncertainty economic environment likely to persist, management expects 1H16 PBT to be lower than that of 1H15, even though revenue is likely to be higher. 
  • Specifically, revenue for both Aerospace and Electronics sectors are likely to be higher, while PBT is expected to be comparable; but for Land Systems and Marine sectors, both revenue and PBT are expected to be lower. 

Buttressed by S$11.5b of order book 

  • Nevertheless, barring unforeseen circumstances, management believes FY16 revenue to still be higher and PBT to be comparable to FY15, as per its previous guidance. 
  • One of the reasons for its cautious optimism probably comes from its healthy order book of S$11.5b (as of end Mar), of which, it expects to deliver about S$3.0b in the remaining months of 2016. 
  • Management also highlights its ample cash balance of S$1.5b, which it could use to expand its business, as well as make strategic acquisitions. 
  • Some of the areas that STE is looking into could include cyber security and homeland security. 

Upgrade to BUY with unchanged S$3.24 fair value 

  • With company maintaining its FY16 guidance, we do not see the need to adjust our estimates for now, as well as our S$3.24 fair value (19x FY16F EPS). 
  • But as the share price has taken quite a tumble of late, valuations are starting to look fairly attractive now; hence we upgrade our call to BUY for a potential total return of 10%.

Carey Wong OCBC Securities | 2016-04-27
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