May 18, 2017

ST Engineering’s (STE) 1Q17 revenue declined5.4% YoY to S$1539.2m, mainly due to lower revenues from the Aerospace (-12%), Land Systems (-14%) and Marine (-16%) sectors, offset by Electronics (+14%).

1Q17 group PBT margin rose 1.0ppt YoY to 9.4%, lifted by improvements at its aerospace (+2.0ppt) and Marine (+3.4ppt) sectors, resulting in PBT increasing 5.1% to S$137.0m, higher if not for non-operating items: 1) a 47% drop in other income as a result of lower wage credit, and 2) a 39.2% decline in share of results from associates and JVs.

Consequently, as tax expenses rose 37.7% YoY, 1Q17 PATMI declined 6.1% to S$103.4m, forming 20% of our FY17 forecast.

Over the near-to-medium term, we expect earnings to be supported by strong order book of S$13.3b as the aerospace and electronics sectors recorded strong new orders during 1Q17.

Over the longer term:1) we expect growth for the aerospace sector to be driven by its passenger-to-freighter (PTF) programmes as well as through its exposure to the growing aerospace industry in China, 2) we are positive on STE’s electronics sector exposure to high growth areas relating to Singapore’s smart nations initiatives (improved ICT capabilities post acquisition of SP Tel) and cyber security, and lastly, 3) growth in land systems to be driven by involvement in the development of autonomous vehicles for urban transport as well as delivering next generation armoured fighting vehicles for MINDEF from FY19 onwards.

All said, we pare our FY17/18 PATMI forecasts by 6%/4% on missed1Q17 and incorporate estimates for FY19-FY21. And as we switch our valuation method from P/E-based to DCF-based [terminal growth: 3.0%; WACC: 6.9%], we derive a higher FV of S$3.70 (prev: S$3.20). Given recent strong appreciation of share price, maintain HOLD on STE. –OCBC


ST Engineering closed at: S$3.74