ST Engineering - CIMB Research 2016-08-15: Benefiting from smart spending

ST Engineering - CIMB Research 2016-08-15: Benefiting from smart spending SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Benefiting from smart spending

  • The change in guidance for STE’s FY16 PBT mainly stems from conservative view taken on the macro environment surrounding marine and land systems.
  • Electronics, the group’s main earnings driver will benefit from both developed nations’ spending on smart cities and developing nations’ infrastructure capex.
  • MRO workload continues to be stable, although margins are trending lower mainly for new PTFs in the pipeline. Its Chinese associates are enjoying high baseload.
  • Our FY16-18F EPS is cut by 2-8% to reflect the quarter and continued drag in marine. Maintain Add and target price (S$3.60), still based on blended valuations.

Electronics milking multiple structural positives 

  • Electronics will benefit from structural positive trends of increasing spending for smart nations, requirement for big data, cyber security, software intelligence for mobility (rail), township planning and demand for sustainable clean energy. 
  • In 1H16, it clinched c.S$1.1bn (US$815m) of contracts, of which c.64% were for advanced electronics and info-comm technologies solutions. 
  • We expect electronics to post 10-11% of PBT growth in FY16-17, if it keeps up with the strong order momentum.

Aerospace stable workload, margin to be lower on new products 

  • There has been no reduction in volume of work nor rates in aerospace. The demand for aircraft maintenance is stable. 
  • Its Chinese associates in Shanghai and Guangzhou have exceeded expectations, driven by volume growth. However, aerospace PBT margin in the short term could be affected the consolidation of European subsidiary, EFW that is developing A330-300 PTF prototype in addition to higher cost base. 
  • We temper our PBT margin from 13.8% to 12% to reflect this.

Land systems’ lower exposure from China 

  • Excluding the c.S$10m (US$7m) gain from GJK China divestment and S$3.8m (US$2.8m) of write-back for inventory provision, land system’s 2Q16 PBT posted 20% qoq growth, mainly from munitions & weapons and service trading, which generate a sustainable S$13m (U$9.5m) in total per quarter. However, US commercial sales have seen stronger demand from Leeboy’s pavers and Hackney’s specialised truck bodies and trailers, which resulted in +10% yoy revenue growth in the US in 2Q16.

Marine dragged by high costs in the US 

  • Marine’s outlook is dire mainly because of the lack of orders and high operating costs from the US yard. We believe Singapore yards are still operating at high utilisation rates for defence projects – Littoral Mission Vessels for Singapore Navy. 
  • We reduce our revenue and profit expectations for 2H16 to incorporate lower ship repair, on the back of weak oil prices that reduce the need for conversion/commercial repairs.

Maintain Add, keep for dividend 

  • The S$0.05 unchanged DPS declared is a good indicator that STE is likely to keep FY16 DPS at S$0.15, translating to a yield of 4.4%. We believe this could be sustainable, backed by its strong balance sheet. 
  • Upside to management’s guidance could come from defence projects in marine and land systems, which could be lumpy and fetch better margins. 
  • Relative to industrial peers in Singapore (SCI, SMM, KEP) that are struggling to replenish backlog, STE’s order book grew qoq to S$11.6bn (1Q16: S$11.5bn).

LIM Siew Khee CIMB Research | 2016-08-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.600 Same 3.600