ST Engineering - OCBC Investment 2017-05-15: Strong Order Book Of S$13b To Support Earnings Ahead

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Strong Order Book Of S$13b To Support Earnings Ahead

• 1Q17 missed on non-operating items.
• Margins improved in 1Q17.
• Guided for higher PBT for FY17.

1Q17 formed 20% of our FY17 forecast 

• Singapore Technologies Engineering’s (STE) 1Q17 revenue declined 5.4% YoY to S$1539.2m, mainly due to lower revenues from the Aerospace (-12%), Land Systems (-14%) and Marine (-16%) sectors, but offset by the Electronics (+14%) sector. STE’s 1Q17 group PBT margin rose 1.0ppt YoY to 9.4%, lifted mainly by improvements at its aerospace sector (+2.0ppt) and Marine sector (+3.4ppt). 
• As a result, PBT increased 5.1% to S$137.0m but could have been higher if not for these non-operating items: 
  1. a 47% drop in other income as a result of lower wage credit, and 
  2. a 39.2% decline in share of results from associates and JVs. 
• Consequently, as tax expenses rose 37.7% YoY, 1Q17 PATMI missed our expectations, as it declined 6.1% to S$103.4m, and formed 20% of our FY17 forecast.

No change in FY17 guidance 

• Over the near-to-medium term, we expect earnings to be supported by strong order book of S$13.3b as the aerospace and electronics sectors recorded strong new orders during 1Q17. 
• STE guided for 1H17 revenue and PBT to be comparable to 1H16; and FY17 revenue to be comparable to FY16, while PBT to be higher than that of FY16. 
• Over the longer-term: 
  1. we expect growth for the aerospace sector to be driven by its passenger-to-freighter (PTF) programmes as well as through its exposure to the growing aerospace industry in China, 
  2. we are positive on STE’s electronics sector exposure to high growth areas relating to Singapore’s smart nations initiatives (improved ICT capabilities post-acquisition of SP Tel) and cyber security, and lastly, 
  3. growth in land systems to be driven by involvement in the development of autonomous vehicles for urban transport as well as delivering next generation armoured fighting vehicles for MINDEF from FY19 onwards.

Maintain HOLD on higher FV of S$3.70 

• All said, we pare our FY17/18 PATMI forecasts by 6%/4% on missed 1Q17 and incorporate estimates for FY19-FY21. 
• And as we switch our valuation method from P/E-based to DCF-based [terminal growth: 3.0%; WACC: 6.9%], we derive a higher FV of S$3.70 (prev: S$3.20).
• Given recent strong appreciation of share price, maintain HOLD on STE.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-05-15

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Up 3.200