ST Engineering - DBS Research 2016-12-13: Earnings should rebound in FY17

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Earnings should rebound in FY17

• FY16 final dividends should be unaffected by one-off write-downs recorded during the year.
• Expect earnings recovery in FY17.
• STE is a beneficiary of the stronger US$.

Maintain BUY; fundamentals remain strong. 

• ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts, and also looks set to resume its earnings recovery trajectory in FY17. 
• 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.

Expect earnings recovery in 2017. 

• In 3Q16, STE reported S$61.1m in one-off write-downs and closure costs related to its Chinese specialty vehicles subsidiary that has ceased operations. But our core estimates remained largely unchanged for FY16/17.
• We expect a reasonable earnings rebound in FY17, following a kitchen-sinking 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. 
• Orderbook remained flattish at S$11.4bn as of end-3Q16, and the YTD announced order win trend is encouraging.

Beneficiary of strong US$, no impact to dividends from one-off items. 

• We believe dividends in FY16/17 should be maintained at 15 Scts, notwithstanding the one-off earnings impact in FY16.
• STE should also stand to benefit from the stronger US$ expectations as around 25% of sales are derived from the US.

Valuation

• Our TP is adjusted to S$3.68 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, the 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 | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-12-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.68 Up 3.500