ST Engineering - Maybank Kim Eng 2016-08-14: 2Q flattered by one-off gain

ST Engineering (STE SP) - Maybank Kim Eng 2016-08-14: 2Q flattered by one-off gain SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering (STE SP) - 2Q flattered by one-off gain

Core profit weak; Maintain HOLD; Muted outlook 

  • 2Q16 core earnings were below our expectations. 
  • Headline profits were boosted by a one-off gain from the divestment of a specialty vehicle business in China. 
  • The group’s muted outlook is reflected by the cut in profit guidance for the year and the stagnant order book. 
  • The stock’s stellar performance in recent months does not seem to reflect any fundamental improvement in its underlying business. 
  • Maintain HOLD with unchanged SGD3.17 TP, based on 18x FY17 EPS, 0.5SD below historical average to reflect our expectation of lower returns in the near term.

Core earnings down YoY again; Guidance cut 

  • 2Q16 reported net profit of SGD127m improved slightly, by 2% YoY.
  • However, we note that this quarter’s earnings were flattered by the oneoff SGD10.4m gain from the divestment of GJK, its speciality vehicle business in China. Excluding this, net profit would have declined YoY for the second consecutive quarter. Hence, we deem core earnings as below expectations. Order replenishment in the quarter wasn’t great as its orderbook remains largely unchanged at SGD11.6b (1Q16: SGD11.5b).
  • 2016 guidance was cut from “higher sales and comparable PBT” to “higher sales, but lower PBT”. STE kept an interim DPS of 5 cts, unchanged.

Aerospace sales boosted by consolidation of EFW 

  • Aerospace revenue rose by 20% YoY due to the consolidation of income from EFW, which was previously an associate. 
  • STE increased its stake in the unit by 20% to 55% at the start of the year. This did not translate into a significant improvement in its PBT.

Weak Marine and Land Systems performance; Electronics the only bright spot 

  • Land Systems sales fell from lower defence deliveries. Despite that, profits rose due to the divestment of GJK. 
  • Profits for its Marine division fell by 31% due to weaker profitability. Its Electronics division was the only bright spot with a sustained improvement in sales and profits.

Derrick Heng CFA Maybank Kim Eng | 2016-08-14
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.170 Same 3.170