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.

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 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.

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).

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.

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.

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 | http://research.itradecimb.com/ 2016-11-10

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.75 Up 3.600