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.

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.

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 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 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.

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.

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 | http://research.itradecimb.com/ 2018-02-24

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.80 Down 3.850