STEng – OCBC

1Q12 EARNINGS IN LINE

Gross margin gain, PATMI up 20%

Marine – most improved segment

Order book remains healthy at S$12.2m

1Q12 financials in line with market expectations

ST Engineering (STE) 1Q12 revenue slipped 2% YoY to S$1.5b but PATMI jumped 21% higher to S$134m. This set of results is aligned with the market’s expectations, with both its 1Q12 revenue and PATMI meeting 24% of consensus and our full-year estimates. STE’s higher PATMI in 1Q12 can primarily be attributed to two factors – 1) a 2.2ppt gain in gross margin to 21% and 2) a 173% jump in share of profits of associated companies which, according to management, was boosted by contribution from its associated company that organized the biannual Singapore Airshow.

Most segments remain healthy

STE’s Aerospace and Electronics segments displayed stable growth in 1Q12. Aerospace and Electronics revenues and grew 1% and 2% respectively to S$456m and S$452m, while their pre-tax profits 5% and 4% to S$60m and S$34m. However, STE’s Land Systems revenue and pre-tax profit contracted 11% and 7% respectively to S$317m and S$24m. This contraction was due to the completion of deliveries of Warthog vehicles to the British military in 1H11. On a positive note, Marine segment’s pre-tax profit rose 20% to S$29m, despite recording 10% lower revenue of S$244m. The Marine segment’s improved margin was the result of a more favourable sales mix, coupled with loss provisions made in 1Q11 to a Ropax ferry shipbuilding contract with Louis Dreyfus Armateurs.

Maintain buy

Management remains optimistic and maintained its guidance of revenue and pre-tax profit growth for FY12. STE’s recent strong flow of new orders should provide investors ample confidence on its ability to replenish, or even grow, its healthy order book of S$12.2b at end-1Q12. We maintain our fair value estimate of S$3.50/share and BUY rating on STE.

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