ST Engineering - CIMB Research 2016-07-12: Defensive pick

ST Engineering - CIMB Research 2016-07-12: Defensive pick ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI 

ST Engineering - Defensive pick

  • STE’s aerospace division secured orders of S$770m (US$570m) in 2Q16, bringing its 1H16 orders to S$1.2bn (1H15: S$1.2bn).
  • We expect 2Q16 order wins for the electronics division to be announced soon.
  • We expect qoq improvements in 2Q16 earnings backed by stronger electronics and marine.
  • Maintain Add but up our target price to S$3.60, still SOP-based but incorporating a higher P/E of 22x (previously 20x) on the back of steady earnings backed by orders.
  • We like STE for its net cash, decent dividend yield, and high ROE vs. other industrial names in Singapore that are facing headwinds in offshore orders.

S$770m in aerospace contracts include military work

  • We are impressed by aerospace’s S$770m contract win announcement for 2Q16 (1Q16: S$443m). The contract includes airframe maintenance, cabin interiors, engine wash and component repair and overhaul. 
  • It also includes work for military operators, which we believe caused the spike in contract value. This brings 1H16’s orders to S$1.2bn, similar to that of 1H15. 
  • Compared to its peers in the industrial segment (KEP, SMM) that are facing an order drought, STE’s order momentum is commendable, in our view.

Electronics’ contracts should remain steady

  • STE will soon announce the 2Q16 contract wins for electronics (at 30%, the second largest earnings contributor). We expect the division to maintain its order momentum of S$450m-500m (1Q16: S$505m), driven by the advanced electronics segment on the back of smart nation and cyber security spending.

2Q16’s earnings preview: qoq improvement

  • STE will release its 2Q16 earnings on 14 Aug 16. We expect the company to generate a PBT of c.S$153m or +18% qoq , -3% yoy. This could bring 1H16 PBT to S$284m, in line with management’s guidance for a lower 1H16 number relative to 1H15’s (S$309m).

No more provisions for marine; electronics stronger seasonally

  • The qoq improvement is largely due to stronger electronics (typically weakest in 1Qs) and the lack of provision from marine’s Crowley’s Con-Ro’s project in 1Q16. 
  • Aerospace’s volume should be sustained by EFW’s consolidation and strong MRO work in China. However, the PBT margin could be compromised slightly to c.11.8-12% on the higher cost base in EFW and pricing competition in China. 
  • Land systems could post stronger qoq earnings with the exit of GKJ from China in Jun 16.

Maintain Add with higher target price of S$3.60

  • Solid order momentum from aerospace and electronics could keep STE’s order book steady at S$11.5bn by end-16 (end-15: S$11.7bn). Unlike its peers, STE is a candidate for defensive yield backed by net cash and high ROE. 
  • Our higher TP is premised on 22x P/E (from 20x) in its SOP valuations, backed by steady earnings on sustainable order wins. 
  • Sizeable defence contracts and stronger earnings growth could be key catalysts. 
  • Risks include execution hiccups and provisions for cost overruns.

LIM Siew Khee CIMB Securities | 2016-07-12
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.60 Up 3.32