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ST Engineering Singapore Company Guide ST Engineering Version 5 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 10 Nov 2016 BUY Earnings should rebound in FY17 Last Traded Price ( 10 Nov 2016): S$3.11 (STI : 2,834.09) Price Target 12-mth: S$3.50 (13% upside) (Prev S$3.55) Maintain BUY; good entry point. ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and Potential Catalyst: Smart city-related contract wins, M&A secure dividend payouts, and the recent share price retreat Where we differ: Slightly more conservative on earnings than consensus creates a better entry point for the stock now. Its Aerospace segment has positioned itself well by investing in growth Analyst markets such as narrow-body aircraft Passenger-to-Freighter Suvro SARKAR +65 6682 3720 [email protected] (PTF) conversions, the Chinese MRO market, and cabin interior Singapore Research Team [email protected] solutions, to name a few. The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but What’s New various overseas markets as well. 3Q16 core earnings in line with expectations 3Q16 earnings in line, excluding one-off writedowns. STE reported headline net profit of S$76.7m, but excluding S$61.1m Exit from Chinese specialty vehicle business in one-off writedowns and closure costs related to its Chinese removes a significant drag on earnings specialty vehicles subsidiary that has ceased operations, 3Q16 core net profit of S$137.8m (up 3% y-o-y, 8% q-o-q) was FY16 dividends likely to be maintained at 15 Scts within expectations. Orderbook remained flattish at S$11.4bn. Core forecasts unchanged, no impact to dividends from one-off items. We lower our FY16 headline net profit estimate by 12% Price Relative to account for the one-off items recorded in 3Q16, but our core estimates remain unchanged for FY16/17. We expect a reasonable earnings rebound in FY17, following a kitchen- sinking year in FY16 associated with a management transition. Cessation of losses at the Chinese specialty vehicle subsidiaries, coupled with continued growth at Electronics division, should help offset weakness at the Marine division in FY17. We believe dividends in FY16/17 should be maintained at 15 Scts, notwithstanding the one-off earnings impact in FY16. Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Valuation: Revenue 6,539 6,335 6,492 6,543 Our TP is adjusted slightly to S$3.50 as we roll over to FY17 EBITDA 835 834 837 883 numbers. Our TP is based on a blended valuation framework Pre-tax Profit 651 630 552 654 Net Profit 532 529 426 519 to factor in both earnings growth and long-term cash- Net Pft (Pre Ex.) 532 529 487 519 generative nature of the business. Net Pft Gth (Pre-ex) (%) (8.4) (0.5) (7.9) 6.6 EPS (S cts) 17.1 17.1 13.7 16.7 EPS Pre Ex. (S cts) 17.1 17.1 15.7 16.7 Key Risks to Our View: EPS Gth Pre Ex (%) (9) 0 (8) 7 A protracted slowdown in the shipbuilding and commercial Diluted EPS (S cts) 17.1 17.1 13.7 16.7 vehicle businesses could hurt prospects, unless STE can offer Net DPS (S cts) 15.0 15.0 15.0 15.0 niche products or streamline operations quickly. Also, BV Per Share (S cts) 68.4 68.7 67.3 69.0 PE (X) 18.2 18.2 22.7 18.6 continued lack of action on the M&A front could lead to PE Pre Ex. (X) 18.2 18.2 19.8 18.6 inefficient use of balance sheet and lower ROEs in the future. P/Cash Flow (X) 15.5 20.7 18.0 14.7 EV/EBITDA (X) 11.1 11.8 11.9 11.3 At A Glance Net Div Yield (%) 4.8 4.8 4.8 4.8 Issued Capital (m shrs) 3,109 P/Book Value (X) 4.5 4.5 4.6 4.5 Mkt. Cap (S$m/US$m) 9,668 / 6,909 Net Debt/Equity (X) CASH 0.0 0.1 0.1 Major Shareholders (%) ROAE (%) 25.0 24.8 20.2 24.5 Temasek Holdings Pte Ltd (%) 51.2 Earnin gs Rev (%): (12) 0 Aberdeen Asset Management (%) 6.0 Consensus EPS (S cts): 15.9 17.1 Other Broker Recs: B: 5 S: 0 H: 7 Capital Group (%) 4.2 Free Float (%) 38.6 Source of all data on this page: Company, DBS Bank, Bloomberg 3m Avg. Daily Val (US$m) 6.4 Finance L.P ICB Industry : Industrials / Aerospace & Defense ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY Company Guide ST Engineering WHAT’S NEW Order win momentum healthy. STE has announced contract 3Q16 results highlights wins totalling S$1bn in 3Q16 – and YTD announced contract wins of S$3.4bn in FY16 remains on track to beat FY15’s Results within expectations. Excluding the impact of the total announced wins of about S$4bn. Orderbook stood at S$61m writedown related to the closure of the Chinese S$11.4bn as of end-3Q16, marginally lower than the specialty vehicle subsidiary Jiangsu Huatong Kinetics (JHK), as S$11.6bn orderbook as of end-2Q16 but still offers good had been guided earlier, profits were in line with expectations visibility of close to two years of revenue. in 3Q16. Headline net profit came in at S$76.7m; core net profit of S$137.8m would have been 3% higher y-o-y and Expect some earnings rebound in FY17 after a lacklustre 8% q-o-q. 3Q16 revenue of S$1,613m was flat q-o-q but up FY16. As we had mentioned earlier, the move to cease losses 8% y-o-y, driven by Aerospace and Electronics segments. at the Chinese auto subsidiary is positive in the longer run and indicative of the new CEO’s desire to start off with a Core margins maintained. Core PBT margin remained flat at clean slate. While we are assuming 8% core earnings decline around 10.4% in 3Q16 compared to 10.5% in 2Q16. in FY16, we should see a reasonable rebound in FY17 Aerospace margins dipped slightly to 11.6% from 12.0% in earnings. Cessation of losses at the Chinese specialty vehicle 2Q16 owing to learning cost curve at its Airbus Passenger-to- subsidiaries, coupled with continued growth at Electronics Freighter operations in Europe, but this was offset by higher division, should help offset weakness at the Marine division in margins from the ship repair business at the Marine segment. FY17. No further impact expected from JHK. Owing to the Operating cash flows remain robust, dividends should be slowdown in Chinese infrastructure building and excess maintained at 15 Scts. STE has generated strong positive supply of commercial vehicle equipment, STE has decided to operating cash flows of S$473m YTD in FY16, compared to exit the specialty vehicle business in China fully, by divesting S$350m cash flow generation in the same period in FY15, one subsidiary earlier in FY16 and has now fully written down owing to favourable working capital movements. With a the net book value attributable to its stake in JHK, and also healthy balance sheet to boot, we believe the non-cash accounted for associated closure costs at JHK. With JHK writedown recorded in 3Q16 should not have an effect on racking up more than S$14m in losses YTD in 2016 – dividends, and total payout for FY16 should be similar to following two years of consecutive losses – the winding up of FY15 levels of 15 Scts. its operations is in the best interests of shareholders, in our opinion. Quarterly / Interim Income Statement (S$m) FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq Revenue 1,500 1,623 1,613 7.5 (0.6) Cost of Goods Sold (1,181) (1,294) (1,279) 8.3 (1.2) Gross Profit 319 330 334 4.9 1.4 Other Oper. (Exp)/Inc (175) (167) (177) 1.1 5.8 Operating Profit 144 162 157 9.4 (3.1) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 15.4 12.4 13.3 (13.3) 7.1 Net Interest (Exp)/Inc (4.6) (4.6) (3.1) 33.1 33.1 Exceptional Gain/(Loss) 0.0 0.0 (61.1) nm nm Pre-tax Profit 155 170 107 (31.1) (37.4) Tax (22.3) (37.3) (34.2) 53.7 (8.3) Minority Interest 0.81 (5.8) 4.21 420.0 (173.2) Net Profit 133 127 76.7 (42.5) (39.8) Net profit bef Except. 133 127 138 3.4 8.2 EBITDA 207 231 236 14.0 2.0 Margins (%) Gross Margins 21.3 20.3 20.7 Opg Profit Margins 9.6 10.0 9.8 Net Profit Margins 8.9 7.8 4.8 Source of all data: Company, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide ST Engineering Aerospace sales growth (%) CRITICAL DATA POINTS TO WATCH Earnings Drivers: Conglomerate with diverse interests in defense and commercial spheres. STE started out life as a defense contractor but has leveraged its technical knowhow over the years to penetrate the commercial market. It boasts multinational operations with a global presence in 23 countries and 41 cities, and hires more than 22,000 employees. The group has reduced its reliance on the defense sector over time from 57% of revenues in 2002 to the current 36%, with another 33% from government agencies and the balance from commercial businesses.
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