STEng – OCBC
Lower S$3.01 fair value on more muted 2011 outlook
Lower revenue but higher PATMI. Singapore Technologies Engineering (STE) 3Q11 revenue fell 6.2% YoY to S$1.4b but PATMI edged 2.7% higher to S$133.8m. The PATMI gain was the result of total one-off gains of S$5.3m, compared to oneoff losses of S$6.9m in 3Q11. For 9M11, revenue increased by 1.8% to S$4.45b and PATMI is up 9.8% to S$375.4m. 9M11 revenue met 71.3% and 71.8% of consensus and our 2011 respective revenue estimate, while 9M11 PATMI reached 71.1% of consensus and 73.6% of our 2011 PATMI estimate.
Segmental contributions. STE’s 3Q11 segmental revenue breakdown saw Aerospace eased 4.7% YoY to S$463.7m, Electronics fell 7.8% to S$311.2m, Land Systems dropped 16.6% to S$306.8m, while Marine gained 0.2% to S$254.8m, and Others surged 40.6% to S$58.1m. Management explained that the bigger-than-expected fall in Land Systems revenue was due to earlier forecasted revenue targets being adversely impacted by the uncertain economic conditions and the delay in some projects. On the pre-tax profit line, Electronics and Aerospace segments were the stars, with their pre-tax profit gaining 10.3% and 9.8% to S$37.6m and S$73.8m respectively; but Land Systems segment recorded pre-tax profit of S$12.3m, or 54.6% lower than a year ago.
Management lowered 2011 guidance. At last Friday’s results briefing, management warned of uncertainties arising from (1) the sovereign debt issue in Europe, (2) the slowing American economy, and (3) unrest in the Middle East and North Africa. Management also lowered its guidance for 2011 revenue and pre-tax profit to be comparable to 2010 versus higher revenue and pre-tax profit previously. Nevertheless, order book remained healthy at S$11b, up from S$10.8b at end-2Q11. Incorporating management’s latest guidance into our earnings model, we have lowered our 2011 revenue and PATMI estimate by 2.4% and 1.3% to S$6.05b and S$503.2m respectively.
Maintain BUY with lower S$3.01 fair value. Given the uncertain global economic outlook and management watering down its guidance, we decided to use a lower forward P/E multiple to price STE. Instead of the 19.4x average forward P/E previously, we now use 18.5x, or half a standard deviation below its historical average, against STE’s EPS estimates over the next four quarters to arrive at a fair value of S$3.01, down from S$3.37 previously; but we maintain our BUY rating on STE.