ST Engineering - CIMB Research 2016-10-13: Tiny dot, global play

ST Engineering - CIMB Research 2016-10-13: Tiny dot, global play SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Tiny dot, global play

  • We hosted a NDR for STE in the US and Toronto. No major change in strategy by the new CEO but we believe resumption of growth and defending dividend are key.
  • Investors were generally surprised by STE’s competitiveness against global players such as Lockheed Martin, General Dynamics, BAE, Panasonic and Siemens.
  • Maintain Add and target price (S$3.60), still based on blended DCF, 22x CY17 P/E and dividend yield. Stronger contract wins could be key catalysts.

New CEO on board, no major change in strategy

  • CEO, Mr. Vincent Chong reiterated that STE has strong businesses with positive long-term fundamentals. Engineering, defense and electronics capabilities continue to be the core competence that connects the four divisions.
  • We believe his aim is to ensure that growth resumes from FY17F by streamlining costs and investing in enhancing technology in electronics and aerospace divisions (c.80% of STE’s 1H16 PBT). We expect non-performing operations to be hived-off at a faster pace.
  • Maintaining its strong balance sheet to ensure firm dividend payout could also be a key, in our view.
  • Mr. Chong brings with him 20 years of experience in running global operations from his career in Exxon Mobil in Japan, UK, US and Singapore.

Electronics in favourable environment

  • Investors were positive about the steady c.10% earnings growth in electronics and its wide service offering from rail electronics, satellite communications to data security and software solutions, stacking up against Panasonic, Siemens and Hughes.
  • Investors were also surprised that the software and solutions provided by electronics were largely proprietarily owned.
  • The division benefits from multiple positive structural trends including urbanisation, smart cities development, and increasing demand for data connectivity and security (physical surveillance, cyber and cloud).
  • We expect the division to secure c.S$2.2bn of contracts in 2016. It has won S$1.1bn (+26% yoy) as of 1H16, of which more than S$700m were from advanced electronics and info-communication and technology solutions.

Aerospace investing for growth

  • Aerospace is investing in new products and offering wider services to cope with the structural change in the MRO industry with better reliability.
  • After the success of converting passengers to freighters (PTF) for Boeing (B757-200 B767-300), it is now developing/launching new PTF conversion for Airbus A320 and A330. We believe this will lead to major contract awards in FY17-18F.
  • Given the gestation of new products, we expect PBT margins to come in at c.12% in FY16-17F (FY15: 14%). We still expect c.4-5% of earnings growth for the division, on steady demand for MRO (backed by low oil price and global fleet expansion).

Land systems almost scrubbed clean, marine still challenging

  • Investors were impressed that STE and its US partner, SAIC beat out General Dynamics to supply 13 amphibious combat vehicles prototype (Terrex 2) to the US Marine Corps in Mar 16. BAE Systems was the other contender.
  • Land systems’ earnings could have bottomed in FY16 after the divestment of lossmaking Chinese specialty vehicles businesses – BZK and GJK in 2Q16. We expect the remaining road paver business, JHK to be disposed soon.
  • Marine’s US yards are being right-sized to cope with the drought in commercial shipbuilding orders while Singapore yard is still busy with the execution of Littoral Mission vessels for Singapore Navy.

Maintain Add, safe yield

  • Stay invested for its strong balance sheet, defensive earnings and steady dividend. 
  • A downside risk is a sudden collapse in the global economy.

LIM Siew Khee CIMB Research | 2016-10-13
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.60 Same 3.600