ST Engineering - OCBC Investment 2018-05-11: Stability Built Upon Diversified Portfolio

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SINGAPORE TECH ENGINEERING LTD SGX: S63

ST Engineering (STE) - Stability Built Upon Diversified Portfolio

• Slight miss in 1Q18.
• Strong order book of S$13.4b.
• On track for steady growth.

Broad-based earnings growth across all sectors

• Singapore Technologies Engineering’s (STE) 1Q18 revenue grew 9.0% y-o-y to S$1646.6m, mainly driven by higher revenues from the Aerospace (+9%), Electronics (+22%), Land Systems (+3%), but offset by the Marine (-16%). 
• In-line with 1Q18 revenue growth, and coupled with a 12.2% y-o-y growth in share of results of associates and JVs, STE’s PBT rose 8.5% y-o-y to S$144.0m. 
• STE also recorded broad-based net profit growth in 1Q18:
  1. Aerospace (+6%),
  2. Electronics (+23%),
  3. Land Systems (+34%), and
  4. Marine (+7%).
• Consequently, as tax expenses and NCI fell 8.7% and 64.2% y-o-y to S$23.9m and S$2.3m, respectively, 1Q18 PATMI grew 17.8% to S$117.7m. However, stripping out one-off impact from Dalfort’s liquidation of ~S$5m, 1Q18 PATMI would have grown 23% to S$122.7m, which formed 23% of our FY18 forecast.

Growing sectors to offset weakness at Marine

• Looking ahead, we believe STE is well poised for growth, supported by a healthy order book of S$13.4b. By sectors:
  1. growth at Aerospace will be driven by its A330 and A320 (the latter expected to secure launch customer by 1H18) passenger-to-freighter (PTF) conversion programmes, higher aircraft engine workshop visits and growing aircraft leasing business,
  2. the continued focus on smart city offerings will provide growth for Electronics and Land Systems (autonomous vehicles and robotics) sectors in Singapore and overseas, and
  3. Land Systems may potentially be awarded the contract for the US Marine Corps Amphibious Combat Vehicle programme, for which it (with SAIC as partner) is of the two final contenders. 
• On the other end, we believe STE’s Marine sector to remain weak for FY18 given the unexpected delay in delivery of its first CONRO till next month, but we expect the weakness to be offset by growth from other sectors.

Unchanged Fair Value of S$4.00

• All considered, while 1Q18 slightly missed expectations, we expect better performance for rest of FY18 and keep our forecasts unchanged. 
• We deem STE’s ability for its different sectors to draw strength upon each other’s capabilities to offer solutions in the areas of defence and smart city solutions as a strong enabler for long-term growth.

Eugene Chua OCBC Investment | https://www.iocbc.com/ 2018-05-11

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