SINGAPORE TECH ENGINEERING LTD
S63.SI
ST Engineering - Earnings should rebound in FY17
- 3Q16 core earnings in line with expectations.
- Exit from Chinese specialty vehicle business removes a significant drag on earnings.
- FY16 dividends likely to be maintained at 15 Scts.
Maintain BUY; good entry point.
- ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts, and the recent share price retreat creates a better entry point for the stock now.
- Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few.
- The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but various overseas markets as well.
3Q16 earnings in line, excluding one-off writedowns.
- STE reported headline net profit of S$76.7m, but excluding S$61.1m in one-off writedowns and closure costs related to its Chinese specialty vehicles subsidiary that has ceased operations, 3Q16 core net profit of S$137.8m (up 3% y-o-y, 8% q-o-q) was within expectations.
- Orderbook remained flattish at S$11.4bn.
Core forecasts unchanged, no impact to dividends from one-off items.
- We lower our FY16 headline net profit estimate by 12% to account for the one-off items recorded in 3Q16, but our core estimates remain unchanged for FY16/17. We expect a reasonable earnings rebound in FY17, following a kitchensinking year in FY16 associated with a management transition.
- Cessation of losses at the Chinese specialty vehicle subsidiaries, coupled with continued growth at Electronics division, should help offset weakness at the Marine division in FY17.
- We believe dividends in FY16/17 should be maintained at 15 Scts, notwithstanding the one-off earnings impact in FY16.
Valuation
- Our TP is adjusted slightly to S$3.50 as we roll over to FY17 numbers.
- Our TP is based on a blended valuation framework to factor in both earnings growth and long-term cash-generative nature of the business.
Key Risks to Our View
- A protracted slowdown in the shipbuilding and commercial vehicle businesses could hurt prospects, unless STE can offer niche products or streamline operations quickly.
- Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future.
Suvro SARKAR
DBS Vickers
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Singapore Research Team
DBS Vickers
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http://www.dbsvickers.com/
2016-11-10
DBS Vickers
SGX Stock
Analyst Report
3.50
Down
3.550
