ST Engineering - UOB Kay Hian 2016-08-15: 2Q16 Lowers Guidance From Comparable PBT To Lower PBT

ST Engineering (STE SP) - UOB Kay Hian 2016-08-15: 2Q16: Lowers Guidance From Comparable PBT To Lower PBT SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering (STE SP) - 2Q16: Lowers Guidance From Comparable PBT To Lower PBT

  • Excluding S$10m in gains from the disposal of a Chinese subsidiary, core net profit would have declined by 6.5% yoy. 
  • 1H16 core earnings amount to 45% and 44% of our and consensus full-year net profit respectively. 
  • Given 2H tends to be seasonally stronger, 1H16 earnings were broadly in line. However, STE has revised down its guidance for 2016 PBT from comparable to lower. 
  • We will provide further details after attending the analyst briefing on 15 August (Monday).



RESULTS


Top-line growth did not filter into bottom-line on weak Marine and Land Systems performance. 

  • ST Kinetics recognised approximately S$10m in gains from the disposal of a Chinese subsidiary. Excluding that, ST Engineering’s (STE) 2Q16 earnings would have declined by 6.5% yoy. 
  • Core 1H16 earnings amount to 45% and 44% of our and consensus full-year estimates. 
  • Given that 2H tends to be seasonally stronger, 1H16 earnings were broadly in line. ST Kinetics also wrote-back an earlier S$3.8m in provisions for obsolescence. 
  • Orderbook stood at S$11.6b in 2Q16 (vs 1Q16: S$11.5b). STE has revised down its guidance for the full year from comparable PBT for 2016 to lower PBT.
  • STE also declared an interim dividend of 5 S cents, unchanged from the previous year. 

Aerospace PBT rose 5% yoy on the back of a 20% rise in revenue. 

  • The acquisition of a subsidiary led to a S$113m rise in revenue for the Engineering & Material Services (EMS) segment. This resulted in a 32% rise in PBT for the EMS sector. However, airframe maintenance revenue declined 9% yoy while PBT rose 11% yoy in 2Q16.
  • Meanwhile, the DHL Express A330 passenger-to-freighter (PTF) contract is expected to contribute in 2H16. STE also guided for lower hoh profitability for the division in 2H16.

The Marine division PBT fell 31% yoy but improved qoq, due to lower declines at the shipbuilding segment. 

  • However, this could be due to non commercial deliveries.
  • STE also guided that the Marine division is expected show an improvement in 2H16 compared to 1H16.

Electronics PBT rose 10% yoy, led by a 33% rise in PBT for the Communication & Sensor Systems Group (CSG) segment. 

  • STE attributed the growth in CSG to increased sales of satellite communication products, as well as milestone completions of higher value contracts. STE also guided for a stronger 2H16 for the Electronics division compared with 1H16.
  • Excluding the divestment gains and writeback in provisions, Land Systems PBT would have declined 17% yoy. STE also guided for lower hoh PBT in 2H16 for the division.


STOCK IMPACT

  • STE will host an analyst briefing on 15 August (Monday) and we would seek clarification on the following: 
    1. For the Land Systems division – the likelihood of further provisions in the near to medium term and the extent of the provisions, 
    2. The strategy and future plans for the Land Systems division in China with the disposal of automotive subsidiary Guizhou Jonyang Kinetics (GJK), 
    3. The reason for the decline in AMM revenue for the Aerospace sector, 
    4. Further details on the expected improvement in 2H16 PBT for Marine.


EARNINGS REVISION/RISK

  • No change to our earnings estimates pending the analyst briefing.


VALUATION/RECOMMENDATION

  • We place our BUY recommendation and target price under review. We will provide further updates after the analyst briefing.


SHARE PRICE CATALYST

  • More contract wins.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.500 Same 3.500


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