ST Engineering - OCBC Investment 2017-11-09: Weak Marine Sector Weighs On Near-term Outlook

ST Engineering - OCBC Investment 2017-11-09: Weak Marine Sector Weighs On Near-term Outlook SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Weak Marine Sector Weighs On Near-term Outlook

  • 9M17 within expectations.
  • Healthy order book of S$13.3b.
  • Guided for comparable PBT for FY17.

9M17 PATMI formed 77% of our FY17 forecast 

  • Singapore Technologies Engineering’s (STE) 9M17 revenue grew 1.1% YoY to S$4917.2m, mainly driven by higher revenues from the electronics (+20%) sector, but offset by the marine (-25%) and land systems (-6%) sectors, while Aerospace sector came in flat. 
  • Due to the absence of prior year’s impairment of asset carry values and the provision of closure costs of subsidiaries located in China for land systems sector, STE’s 9M17 PBT rose 10.4% YoY to S$449.7m. 
  • By key business sectors, 9M17 group PBT margin improved slightly by 0.8ppt YoY to 9.1%, largely driven by its land systems sector (+5.5ppt) due to the absence of impairment charge but offset by marine sector (-5.0ppt) on weak industry conditions and weaker U.S. operations. 
  • Consequently, stripping out prior year’s impairment charge, STE’s 9M17 core PATMI came in within expectations as it declined 8.5% YoY to S$343.4m, which formed 76.6% of our FY17 forecast.

Marine sector still a drag for now 

  • Over the near term, we expect the outlook for the marine sector to remain weak with persistent industry headwinds due to volatile and uncertain outlook of oil prices. That said, we expect group earnings ahead to be supported by its strong order book of S$13.3b as at end-3Q17. FY17 revenue and PBT is expected to be comparable to FY16. 
  • Over the longer-term, we continue to be positive on STE’s electronics sector exposure to high growth areas relating to Singapore’s smart nation initiatives (ICT-related business), cyber security, and smart city business that is gaining traction overseas. 
  • Another long-term growth driver could possibly be derived out of its recent acquisition of 100% interest in Aethon, known for its TUG Autonomous Mobile Robot (AMR) capable of lifting up to 635kg of load. Aethon already has more than 200 live customer sites, mostly in the U.S., and STE has plans to expand beyond U.S. and outside of its current focus in healthcare segment.

Maintain HOLD with unchanged S$3.61 FV 

  • All considered, we do not see any near-term catalysts but remain positive over its long-term growth strategy. On in-line 9M17 results, we keep our forecasts unchanged. 
  • Maintain HOLD with a FV of S$3.61.

Eugene Chua OCBC Investment | 2017-11-09
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 3.610 Same 3.610