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.

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.

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.

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).

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.

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 | http://research.itradecimb.com/ 2016-07-12

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 3.60 Up 3.32