ST Engineering - CIMB Research 2016-11-10: Trumped expectations

ST Engineering - CIMB Research 2016-11-10: Trumped expectations SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Trumped expectations

  • Excluding the impairment of S$61m for the land systems business in China, 3Q16’s net profit of S$138m is 10% above our forecast and consensus, thanks to marine.
  • Marine delivers its second consecutive quarter of profit, lifted by strong ship-repair for defense vessels and execution of high-margin LMV vessels in Singapore.
  • The worst is over for Land Systems as operations for loss-making JHK has ceased.
  • Aerospace is investing for new PTF prototype while Electronics benefits from urbanisation, smart nation spending and cyber security awareness.
  • STE could gain thematically from increased spending within US – 25% of its revenue are derived in US. Maintain Add.

Strong quarter 

  • STE’s 3Q16 reported net profit of S$76.6m included S$61m impairment for closing down Land System’s (LS) loss-making JHK in China. 
  • 9M16 core net profit formed 78% of our FY16F. It secured S$1bn of new contracts in 3Q16 and S$3.5bn YTD (+48% yoy).

Marine yard is full in Singapore, unlike peers 

  • Marine surprised positively with a PBT of S$39m (+89% qoq), with a 74% qoq growth in ship repair (PBT of S$25m), refitting vessels for Royal Navy of Australia. The lumpiness could be one-off but we see defense nature of work as a wild card to plug the weakness in the commercial segment. 
  • Shipbuilding was profitable (PBT of S$10m,+91% qoq) with no cost overrun and is scheduled to deliver two LMV vessels for Singapore Navy in 2017. Its US shipyard stands to gain on a Trump victory spending, in our view.

Land systems great again 

  • Ex impairment, LS’s PBT would have been S$19.7m in 3Q16. With the woes of China losses and inventory provisions over, LS could deliver PBT of c.S$60m/p.a. Munition and weapon (40% of LS PBT) is largely dependent on SAF defense budget while service trading (40% of LS PBT) generates recurring MRO income and trading of spares for MAN buses and fleet of taxis (CityCab and Uber).

Aerospace steadily investing for the future 

  • 3Q16 PBT remained steady (+3% yoy) at S$65m. The qoq (-12%) weakness is largely due to lesser work done during the summer months as airlines fly more. 
  • Relative to SIA Engineering, ST Aerospace is stronger given its diversification of work and customer network. 9M16 PBT margin of 11.9% (FY15: 13.8%) was lower yoy mainly due to investment of new PTF prototype A320 and A321. Therefore, Aero’s PBT margin is likely to be rangebound until end-FY18 when gestation is over.

Electronics 10% annual growth not an issue 

  • The division delivered a 3Q16 PBT of S$53m (+7% yoy,+3% qoq). 9M16 PBT of S$144m formed only 68% of our FY16F but we expect a seasonally-stronger 4Q16.
  • Electronics is expected to deliver a better yoy PBT. The division is a beneficiary from the regional urbanisation trend ahead, especially from the MRT lines expansion in Bangkok.

Dividend is safe on net cash of S$262m, maintain Add 

  • We believe the S$0.15 DPS is safe given the strong performance across segments.
  • STE’s net cash (including investments in bonds) stood at S$262m. We adjust our core EPS by 2% for FY16-18F on margin tweak across segments. 
  • Our TP is raised to S$3.75, still based on blended valuations (rolling over to CY18). 
  • Stronger-than-expected orders and divestment of loss-making non-core business could be the key catalyst. 
  • Key risks include a general slowdown in Asian economies.

LIM Siew Khee CIMB Research | 2016-11-10
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.75 Up 3.600