ST Engineering - OCBC Investment 2016-11-11: Resilient earnings amidst headwinds

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Resilient earnings amidst headwinds

• 9M16 dragged by one-time impairment.
• Expects near-term headwinds to persist.
• Maintain HOLD as FV increases.

Core 9M16 within expectations 

• Singapore Technologies Engineering’s (STE) 9M16 revenue rose 6.7% YoY to S$4863.2m, mainly driven by higher revenue from the Aerospace and Electronics sectors. 
• However, group PBT fell 12.2% to S$407.3m, dragged by net loss at its Land Systems sector, as a result of a S$61.1m one-off charge consisting of an impairment of asset carrying value and provision for closure costs for its road construction equipment business in China. 
• 9M16 PATMI declined 19.1% YoY to S$314.1m, but excluding one-off items recorded under Land Systems’ China specialty vehicles (SV) business, core PATMI fell by a smaller 6.0% to S$364.8m, which met 74.6% of the street’s FY16 estimates.

Maintaining guidance on lower PBT for FY16 

• Looking ahead, STE kept its guidance for FY16 unchanged as it expects revenue to be higher, with PBT lower than that of FY15. Specifically, STE is guiding for: 
1. Aerospace revenue to be higher, driven by contribution of its new subsidiary EFW, and PBT to be comparable likely due to lower margins at EFW, 
2. Electronics revenue and PBT to both be higher driven by higher contributions from large-scale systems group (LSG), communication & sensor systems group (CSG), and higher receipts from government grant, 
3. Land Systems revenue and PBT to both be lower mainly due to divestment of SV business in China and one-time impairment charge recorded in 3Q16, and lastly, 
4. Marine revenue and PBT to both be lower on decline in contributions from shipbuilding and engineering segments, offset by ship repair segment, on the back of persistent headwinds in the oil & gas industry.

Likely to maintain 15 S-cents dividend payout for FY16 

• That said, STE ended 3Q16 with a healthy order book of S$11.4b, and will be delivering S$1.4b worth of orders in 4Q16. 
• Over the longer-term, we expect growth in the Aerospace and Electronics sectors to continue and with a change in analyst, we raise our FY16/17F core PATMI by 1.8%/1.9%. 
• Consequently, our FV increases from S$3.13 to S$3.20. Maintain HOLD, supported by 4.8% forward dividend yield.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-11-11

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 3.20 Up 3.130