ST Engineering - CIMB Research 2017-05-14: Lacklustre Quarter, Fundamentally Defensive

SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Lacklustre Quarter, Fundamentally Defensive

1Q17 was a miss mainly due to provisions for doubtful debts from exposure to oil & gas as well as losses from Miltope.
All other divisions performed in line with expectations; aerospace is seeing stronger margins from EFW Germany.
1Q17 order wins were impressive at S$1.6bn. Order momentum may be lumpy; we believe S$5.5bn of orders are possible in FY17F.

We like STE as a proxy for smart nation and ICT spending. Its recent acquisition of fibre optic infrastructure (SP Tel) has enforced its position in the space.
Maintain Add and target price of S$3.82 on blended valuations (22x P/E, DCF and dividend yield). Catalysts include stronger margins and earnings accretive M&As.

1Q17 net profit of S$103m (-6% yoy, -39% qoq) was below our expected S$125m mainly due to c.S$14m of provisions for doubtful debts incurred in marine for oil & gas conversion projects.
”Others”, which mainly accounted for US Miltope and airshow income from Experia, showed a wider loss of S$8m (4Q16:-S$3m) due to delays in defence programmes; although, there were some order wins in 1Q17.
Overall group guidance for 2017 remained to be better than 2016, suggesting stronger quarters ahead.

Aerospace won S$1.1bn of contracts in 1Q17, helped by multi-year (average 5 years) renewals from both commercial and military customers. Momentum may not be sustainable, but we expect the division to close S$2.5bn-3bn of orders in FY17F (FY16: S$2.57bn).
1Q17 PBT margin rose to 14.1% (1Q16:12.1%) thanks to stronger efficiency achieved in EFW Germany.
Utilisation is nearly full at its US hangars and first hangar in Guangzhou. The second hangar recently set up in Guangzhou will add 1m of man-hours p.a. in its steady state (end-FY18) or about 10% of its overall capacity.

Its acquisition of 51% of SP Telecommunications (SPTel) was completed in early May for a consideration of S$55m. SPTel owns an extensive network of fibre optic back-haul infrastructure and facilities, similar to Netlink Trust.
The combination of the ICT expertise of Electronics and the assets of SPTel will enhance Electronics’ capabilities in its strategy to build a comprehensive suite in the smart-city offering. Electronics’ 1Q17 PBT margin dipped to 7.8% (1Q16:8.5%) due to lower iDirect sales.

The division incurred S$13.5m of provisions for doubtful debts for oil & gas conversion, leaving minimal exposure to the segment. We are heartened that shipbuilding PBT margin came in at 4.6%.
We believe the focus on para-defence jobs could be the key to ensure defensive earnings. Arbitration with Hornbeck is ongoing.
Some provision was made in 4Q16 but the extent was not disclosed. Hornbeck is claiming US$43.5m from VT Halter Marine with a counter claim of US$3.3m.

Order book stood at S$13.3bn and net cash including investments stood at S$710m. We cut FY17F EPS by 2% to reflect marine’s 1Q17. Share price could be under pressure in the near term post a lacklustre 1Q17.
Fundamentally we still like STE as a proxy for smart nation, ICT, a stronger US economy story, and regional infrastructure spending.
Key risks include execution failure and litigation costs.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-05-14

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