ST Engineering - CIMB Research 2017-08-11: Long-term Vision Intact, Bear With Marine For Now

ST Engineering - CIMB Research 2017-08-11: Long-term Vision Intact, Bear With Marine For Now SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Long-term Vision Intact, Bear With Marine For Now

  • ST Engineering's 2Q17 net profit of S$111m was 20% below our S$139m forecast. 1H17 net profit of S$230m formed 41% of our FY17F. S$0,05 DPS declared, similar to 1H16.
  • Cost overrun in US yard caused the marine division to incur 2Q17 pretax loss of S$8m. STE has a turnaround plan for the yard, which we are positive on.
  • Land systems delivered biggest qoq earnings growth, while electronics and aerospace were broadly in line.
  • We expect share price to come under pressure due to the weak results but still view STE as a good proxy for innovation, technology and smart city theme in the long run.

Marine US yard wiped out profits from Singapore 

  • Marine’s 2Q17 pretax loss of S$8m came from S$22m shipbuilding loss for cost overrun and 1-month downtime (weather) for 2 Crowley LNG ConRo vessels (secured in 4Q13 by its US yard, VT Halter). 
  • We think VT Halter underestimated the complexity of the first-of-its-kind LNG ConRo vessel design and incurred losses. 
  • We think there may still be small provisions by end-FY17F or FY18F, when these vessels are delivered. Excluding these, shipbuilding was profitable, with delivery of Littoral Mission Vessels to Singapore Navy.

Land systems aiming right, Miltope on track to turnaround 

  • Land systems achieved the highest PBT since 2014 of S$29m (+5% yoy, +81% qoq) due to completion of defence automotive projects and sale of 40mm munition. PBT margin swung from 5.8% in 1Q17 to 9.6% in 2Q17. The 40mm munition project will recur in 2H17F. 
  • The division has delivered 14 Amphibious Combat Vehicle (ACV) prototypes to the US Marine Corps, with 2 to be delivered in 2H17F. 
  • “Others” losses narrowed to S$2m in 2Q17 (1Q17: S$8m) as Miltope almost broke even. We expect S$2m profit for FY17F.

Electronics division still hopes to achieve c.10% PBT margin 

  • Electronics net profit of S$52m (+25% qoq, +2% yoy) was in line with our expectations. PBT margin was 8% for 1H17 vs. 11% in 1H16 mainly due to lower sales from iDirect, which we expect to improve in 2H17F when new products are rolled out. 
  • The division secured S$490m of contracts in 2Q17 and S$954m YTD (2016: S$2bn).

Aerospace steady, engine checks returning 

  • Aerospace net profit of S$78.9m (+1%qoq, +6% yoy) was below, with PBT margin down to 12% in 2Q17 (FY16: 16%) due to completion of VIP project and B757 PTF. 2H17 earnings were weaker due to summer famine (more flights, less work) and learning curve on A330-300 PTF for DHL, Egypt Air. However, engine checks are returning for CFM 56 for A320 and B737 aircraft. 
  • Aerospace reaffirmed PTF market leadership as DHL awarded 4+10 A330-300 contracts and accelerated delivery of first 4 (awarded in 2016).

Long-term vision intact 

  • We think STE has the best of both worlds with commercial and defence backbone to support its technology, as well as innovation aspirations that span autonomous, robotics, cyber security and smart nation spending. 
  • Potential key catalysts are sizeable contracts, including more DHL passenger-to-freighter (PTF) conversion planes, ACVs for US Marine Corps, KL-SG High Speed Rail consortium work. 
  • Earnings-accretive M&As, such as distressed repair yard, could also drive up its share price.

Record-high order book; Maintain Add and TP of S$3.82 

  • Order book is at a record-high of S$13.5bn (+16% yoy) at end-2Q17, sustaining longterm earnings visibility mainly in the electronics and aerospace divisions. 
  • We adjust our EPS by -1% to +1% for FY17-18F for weaker marine but stronger land systems earnings.
  • Our TP is unchanged, based on blended valuations (22x CY18F P/E, DCF and dividend yield).

LIM Siew Khee CIMB Research | 2017-08-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.820 Same 3.820