ST Engineering - CIMB Research 2018-02-24: Set To Grow Even With Marine’s Blip

ST Engineering - CIMB Research 2018-02-24: Set To Grow Even With Marine’s Blip SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Set To Grow Even With Marine’s Blip

  • ST Engineering's FY17 net profit of S$512m is 4% above consensus but in line at 99% of our expectations, although lifted by S$20m tax credit.
  • We are seeing a comeback from engine repairs, which resulted in 6% y-o-y growth in aerospace in FY17. The division registered c.3% y-o-y growth in the past two years.
  • Marine was a disappointment, with more cost incurred for Con-Ro projects.
  • Despite the blip in marine, we think ST Engineering will be able to deliver 9-10% y-o-y earnings growth in FY18, driven by the remaining divisions.
  • Maintain ADD. Target Price is reduced to S$3.80 from S$3.85 on lower profits from marine, still based on a blend of DCF, P/E and dividend yield. Risks are continuing loss in marine.

Lower tax ahead 

  • Ex-tax credit, FY17 net profit of S$498m grew 2%, led by growth in all divisions except marine. Order book was at S$13.2bn. 4Q17 net profit was steady y-o-y at S$169m (+31% qoq). The new tax plan in the US (from a tax rate of 35% to 21%) resulted in deferred tax liabilities being revalued, particularly from land system. This resulted in a S$20m tax gain.
  • With 20% of its revenue derived in the US, we expect the effective group tax rate to fall to c.15.3% (from c.16.6% in FY14-16). FY18-19 EPS cut on lower marine profits.

Margin improvement in aero, engine repair is back after five years 

  • Aerospace 4Q17 PBT of S$94.5m (+20% q-o-q, +9% y-o-y) was commendable despite the passenger-to-freighter (PTF) learning curve for the A330-300 and A330-200. Components, engine repair and overhaul PBT grew 100% y-o-y to S$23m, the strongest quarter since 4Q12 and the third consecutive q-o-q growth, substantiating the thesis of the return of MRO cycle for CFM engines. 
  • We believe the segment will remain strong until 2022. As a result, aerospace PBT margin expanded to 12.5% in FY17 (FY16: 12%).

Marine still the weak link, sustained by ship repairs 

  • Marine 4Q17 PBT of S$0.4m was dragged by S$17m loss from shipbuilding with cost overrun for Con-Ro vessels, which should be delivered in Mar 18 and 1H18. We expect losses in 1H18 for shipbuilding due to Con-Ro, coupled with anemic shipbuilding orders.
  • Ship repair plugged the gap with S$13m PBT (-24% q-o-q, +9% y-o-y). The q-o-q weakness was due to the absence of provision write-back in 3Q17. Ship repair PBT stood strong at 24% and we see a demand recovery on the back of sustained oil prices.

Electronics and land system steady 

  • Electronics 4Q17 PBT of S$63m (+13% q-o-q, -2% y-o-y) was in line with our expectations. Order win momentum was steady y-o-y at S$2.3bn, driven largely by advanced electronics and ICT solutions. 
  • Land system 4Q17 PBT of S$24m (+62% q-o-q, +1% y-o-y) was slightly above our expectations, thanks to higher services & trading PBT of S$13m (+17% q-o-q, +47% y-o-y). This is mainly from recurring income from MRO, trading of spare parts for MAN buses as well as vehicle inspections/fleet repair for Lion City.

Moving into healthcare technology 

  • ST Engineering is creating a new team to leverage existing capabilities to expand into healthcare innovation and technology, specifically to improve hospital operating efficiency. Currently, its robotic operations via Aethon have already gained a foothold in 140 US hospitals.

Maintain Add; target price dips to S$3.80 

  • ST Engineering’s valuation is undemanding at 17x CY19 P/E, at -1 s.d. of its 5-year average (20x). Its 12M performance has lagged peers in capital goods, mainly because of its lacklustre quarterly earnings and recurring provisions for marine. 
  • We think catalysts could come from stronger-than-expected earnings from aerospace and M&As. 
  • It has net cash of c.S$180 (including funds under management), supporting the c.4% dividend yield.

LIM Siew Khee CIMB Research | 2018-02-24
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.80 Down 3.850