ST Engineering - DBS Research 2016-08-16: Building up towards long-term gains

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Building up towards long-term gains

• 2Q16 earnings largely within estimates.
• Interim dividend of 5 Scts declared (unchanged).
• Pressure on 2H16 numbers.
• Should see rebound in FY17.

Maintain BUY; good defensive bet. 

• ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts amidst tough market conditions. 
• Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few. 
• The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but various overseas markets as well.

2Q16 net profits largely in line. 

• 2Q16 net profit of S$127m (up 2% y-o-y, 15% q-o-q) was in line with expectations, though boosted by a one-off divestment gain of around S$10m arising from the sale of a specialty vehicle subsidiary in China under the Land Systems division. 
• Orderbook inched up to S$11.6bn.

Lowering FY16 forecasts, but long-term prospects intact. 

• We lower our FY16 earnings estimate by 4% to factor in the learning curve in the Airbus P2F programme over at Efw, as well as ongoing challenges at the Land Systems and Marine segments. This is also in line with revised management guidance of overall lower PBT in FY16 compared to FY15 (earlier guidance: comparable PBT). 
• However, investments in building capabilities in the Aerospace division and continuing growth in Electronics segment driven by smart city initiatives should help to ramp up earnings from FY17 onwards.

Valuation

• Our TP remains at S$3.55 as we roll over to blended FY16/17 numbers. The TP is based on a blended valuation framework to factor in both earnings growth and long-term cash-generative nature of the business.

Key Risks to Our View

• A protracted slowdown in the shipbuilding and commercial vehicle businesses could hurt prospects, unless STE can offer niche products or streamline operations quickly. 
• Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.

Suvro SARKAR DBS Vickers | DBS Vickers | http://www.dbsvickers.com/ 2016-08-16

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.550 Same 3.550