Singapore Company Guide ST Engineering Version | Bloomberg : STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 16 May 2016 BUY Orderbook remains robust Last Traded Price: S$3.08 (STISTISTISTI : 2,734.91) Maintain BUY; investment thesis intactintact.. ST Engineering remains Price Target : S$3.55 (15% upside) (Prev S$3.65) a defensive stock with a healthy balance sheet and secure dividend payouts amidst a volatile equity market. Its Aerospace Potential Catalyst: Smart city order wins, M&A segment has positioned itself well by investing in growth Where we differdiffer:::: Slightly more bearish on earnings estimates markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior Analyst Suvro SARKAR +65 6682 3720 [email protected] solutions, to name a few. The Electronics segment should also Singapore Research Team benefit from the ‘Smart City’ trend, which could open up a US$400-500bn market by 2020. What’s New 1Q1Q1Q161Q 16 core profits in line; orderbook healthy. Headline profits • 1Q16 core profits in line; headline PBT affected by before tax (PBT) for 1Q16 came in at S$130m, down 13% y-o- one-off items y and 22% q-o-q, but this was skewed by one-off items • Revenues boosted by Aerospace initiatives including fair value gains, Singapore Airshow expenses and provisions on US shipbuilding contracts, without which we • Orderbook of S$11.5bn remains healthy think the Group would have achieved a ~S$160-165m PBT. Tweaking forecasts on EFW consolidation and nearnear----termterm Price Relative margin pressurespressures.... We adjust our revenues upward by 2% each S$ Relative Index in FY16 and FY17 mainly to account for the consolidation of 4.4 207 subsidiary EFW after ST Aerospace increased its stake to 55%. 187 Profits are revised down by 6%/4% in FY16/FY17 due to 3.9 167 margin pressures at the Marine segment (poor US shipbuilding 3.4 147 127 performance), Electronics segment (higher R&D and marketing 2.9 107 for new products) and Aerospace segment (as new businesses 2.4 87 May-12 May-13 May-14 May-15 May-16 ramp up operations). ST Engineering (LHS) Relative STI INDEX (RHS) Valuation: Forecasts and Valuation Our TP is adjusted to S$3.55 following the cut in earnings. The FY Dec (((S$S$S$ m) 2014 AAA 2015 AAA 2016 FFF 2017 FFF TP is based on a blended valuation framework to factor in both Revenue 6,539 6,335 6,695 6,649 EBITDA 835 834 833 869 earnings growth and cash-generative nature of the business. Pre -tax Profit 651 630 612 644 Net Profit 532 529 505 531 Key Risks to Our View: Net Pft (Pre Ex.) 532 529 505 531 The structural changes facing the aircraft MRO industry could Net Pft Gth (Pre -ex) (%) (8.4) (0.5) (4.5) 5.0 EPS ( S cts ) 17.1 17.1 16.3 17.1 hit harder than expected, as newer airframe and engines EPS Pre Ex. ( S cts ) 17.1 17.1 16.3 17.1 reduce maintenance spend and lengthen the cycle for checks EPS Gth Pre Ex (%) (9) 0 (4) 5 and OEMs take a larger share of the aftermarket services. Also, Diluted EPS (S cts ) 17.1 17.1 16.3 17.1 Net DPS ( S cts ) 15.0 15.0 15.0 15.0 continued lack of action on the M&A front could lead to BV Per Share ( S cts ) 68.4 68.7 70.0 72.2 inefficient use of balance sheet and lower ROEs in the future. PE (X) 18.1 18.1 18.9 18.0 PE Pre Ex . (X) 18.1 18.1 18.9 18.0 At A Glance P/Cash Flow (X) 15.4 20.5 16.4 14.2 Issued Capital (m shrs) 3,105 EV/EBITDA (X) 11.0 11.6 11.7 11.2 Mkt. Cap (S$m/US$m) 9,563 / 6,970 Net Div Yield (%) 4.9 4.9 4.9 4.9 Major Shareholders (%) P/Book Value (X) 4.5 4.5 4.4 4.3 Net Debt/Equity (X) CASH 0.0 0.0 0.0 Temasek Holdings Pte Ltd (%) 51.3 RO AE (%) 25.0 24.8 23.5 24.1 Aberdeen Asset Management (%) 6.0 Capital Group (%) Earnings Rev (%): (6) (4) 5.0 Consensus EPS (S cts )::: 16.5 17.2 Free Float (%) 37.7 Other Broker Recs: B: 5 S: 1 H: 6 3m Avg. Daily Val (US$m) 8.2 ICB Industry : Industrials / Aerospace & Defense Source of all data: Company, DBS Bank, Bloomberg Finance L.P ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:YM Company Guide ST Engineering WHAT’S NEW up operations to peak levels. However, we believe these new Investment thesis intact businesses in cabin interiors and passenger-to-freighter conversions position the Aerospace segment to ride on 1Q16 core profits in lineline.... Headline profits before tax (PBT) growth trends in the region, and will drive profits in the for 1Q16 came in at S$130m, down 13% y-o-y and 22% q- medium term. o-q, and representing 20% of our full-year forecast. This was mainly due to: i) fair value losses of S$12.5m on the Group’s Land systems down but not outout.... The Land Systems segment financial instruments/hedges; ii) one-off expenses of S$9m saw revenues fall by 17% y-o-y to S$285m in 1Q16, as all on the Singapore Airshow; and iii) provisions taken at the three of its business groups recorded declines in revenues, Marine segment on shipbuilding projects. Otherwise, we mainly from project deliveries being shifted out. As a result, think core PBT of ~S$160-165m was roughly in line with our PBT for the segment fell by 28% y-o-y to S$11.5m. While estimates. Meanwhile, order wins YTD in 2016 totalling sales of road construction vehicles remain weak in Brazil and S$948m are in line with last year’s pace, and an S$11.5bn China, and should continue to weigh on profitability, the orderbook as of 31 March 2016 maintains revenue visibility. recently announced sale of its entire 60% stake in the underperforming Guizhou Jonyang Kinetics (GJK) business – Provisions drag Marine earnings downdown.... The Marine segment which mainly builds excavators in China – should help the saw its PBT plummet to S$3.3m in 1Q16, down 85% y-o-y Land Systems segment reduce margin pressure going from S$23.4m. This was primarily due to the shipbuilding forward. segment's net loss of S$11.4m for the quarter, as provisions were taken on its projects in the US. We do not expect such Strong toptop----lineline growth for ElectronicsElectronics.... Revenues for the substantial net losses to be recurring, although we cannot Electronics segment were up 28% y-o-y at S$464m, driven rule out additional provisions entirely since the US operations by strong sales at the Communications & Sensor Systems continue to suffer from design, vendor performance and business group, due to roll-out of new products. PBT grew scheduling issues. by 13.4% y–o-y to S$39.5m. The full revenue impact did not flow through due to high investments in R&D, marketing Aerospace segment is well positionedpositioned.... The Aerospace expenses for new products and other expenses such as segment’s PBT of S$75.2m was up by 5% y-o-y, on higher spending on the Singapore Airshow dampened. revenues (boosted by contribution from EFW, which became a subsidiary of ST Aerospace in January 2016 after ST Aerospace increased its interest in the company to 55%) and contributions from associates. However, PBT margins were weaker, at 12.1% vs. 14.6% in 1Q15, reflecting the contribution from new subsidiaries which have yet to ramp Quarterly / Interim Income Statement (S$m) FY Dec 1Q1Q1Q20151Q 2015 4Q4Q4Q20154Q 2015 1Q1Q1Q20161Q 2016 % chg yoy % chg qoq Revenue 1,511 1,779 1,627 7.7 (8.5) Cost of Goods Sold (1,219) (1,441) (1,335) 9.5 (7.3) Gross Profit 292 338 292 (0.1) (13.5) Other Oper. (Exp)/Inc (149) (185) (180) 20.8 (2.6) Operating Profit 143 153 112 (21.9) (26.7) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 11.2 17.6 22.6 102.6 28.5 Net Interest (Exp)/Inc (4.0) (3.9) (4.2) (6.2) (9.7) Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm PrePrePre ---tax Profit 151 167 130 (13.4) (21.7) Tax (19.0) (23.4) (19.6) 3.1 (16.1) Minority Interest (1.5) (2.3) (0.6) (63.8) (76.7) Net Profit 130 141 110 (15.2) (21.7) Net profit bef Except. 130 141 110 (15.2) (21.7) EBITDA 199 221 190 (4.4) (13.7) Margins (%) Gross Margins 19.4 19.0 18.0 Opg Profit Margins 9.5 8.6 6.9 Net Profit Margins 8.6 7.9 6.8 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 11.2 10.4 9.0 Earnings Drivers: 7.5 Conglomerate with diverse interests in defense and commercial 6.1 spheres. STE started out life as a defense contractor but has 4.7 4.1 leveraged its technical knowhow over the years to penetrate the 3.3 3 commercial market.