ST Engineering - CIMB Research 2016-08-12: 2QFY17 Electrifying

ST Engineering - CIMB Research 2016-08-12: 2QFY17: Electrifying SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - 2QFY17: Electrifying

  • 2Q16 core net profit of S$127m was in line with all segments posting significant qoq improvement but Aerospace remained steady. Electronics was the star.
  • We were relieved at Marine’s shipbuilding turnaround with a profit.
  • Despite a decent 1H16, STE is tempering its FY16 PBT guidance to be lower than FY15 (previously comparable). Maintain Add and target price pending briefing.

Aerospace firm aircraft maintenance but hit by EFW, components

  • Aerospace PBT rose 5% yoy but dipped 1% qoq. PBT margin remained stable qoq at 12%, but lower than our expected 13.8%. STE’s 1H16 NP was in line at 24% of our FY16 forecast.
  • Aircraft & maintenance (63% of aero’s profit) delivered higher yoy and qoq profit and margin, could be due to cost efficiency achieved in its Chinese operations.
  • But overall aerospace’ PBT was stalled by additional inventory obsolescence provision (up S$5m qoq) and high cost base in European subsidiary EFW.
  • 2H16 PBT is expected to be lower h-o-h.

Electronics was the star

  • Electronics PBT surged 29% qoq with the strongest growth (82% qoq) seen in satellite & communications, possibly due to more delivery of projects.
  • We believe electronics is reaping the benefits of its strong order momentum of S$1.6bn-2bn over the past two years.
  • PBT margin returned to its norm of 11%. We expect 2H16 PBT to be higher h-o-h.

Sigh of relief from Marine

  • Marine PBT grew five-fold qoq lifted by a turnaround in shipbuilding, from a loss in 1Q16 to profit. We believe this could mean that cost overruns and provisions made for Crowley project were sufficient.
  • Ship repair was also stronger with PBT margin climbing to 20% from 15% in 1Q16.
  • 2H16 PBT is expected to be lower h-o-h.

Land systems relying on defence

  • Land systems PBT climbed 140% qoq mainly from one-off gain from the divestment of Chinese GJK. This also resulted in the write-back of inventory provisions.
  • Excluding this, we believe automotive could still be in a slight loss, similar to 1Q16.
  • Profit from munition & weapon and service trading remained steady qoq, and contributed to more than 90% of land system’s profit.
  • 2H16 PBT is expected to be lower h-o-h.

Toning down guidance to be conservative

  • The change in guidance could stem from weaker expectations from aerospace and land systems in 2H16. We keep our EPS forecasts unchanged for now.
  • Our target price (S$3.60) is based on blended valuations of 22x CY17 P/E, DCF (WACC: 5.4%) and dividend yield. We like STE for its strong balance sheet, high ROE and decent yield.
  • An interim S$0.05 DPS (1H15: S$0.05) was declared. Catalysts include stronger MRO demand while sudden global economy slowdown is a key risk.

LIM Siew Khee CIMB Research | 2016-08-12
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