STEng – DBSV

Healthy earnings momentum

2Q12 net profit of S$143m (up 10% y-o-y) slightly ahead of our estimates; margin improvements across all segments

Orderbook at record level of S$12.7bn underpins earnings visibility, going forward

Maintain BUY with higher TP of S$3.60

Highlights

Another strong quarter. 2Q12 net profit of S$143m was slightly above our expectations of S$138m, even after adjusting for S$12.8m gains on the sale of investment property, which was largely offset by S$10m allowance for doubtful debts. Revenue was up 10% y-o-y and 7% q-o-q to S$1.57bn, driven largely by the Land Systems and Marine sectors. 1H12’s net profit of S$277.5m makes up 50% of our existing full-year estimates for FY12, which is ahead of usual seasonality.

Margin improvement across all sectors. Overall PBT margin improved sequentially to 12% in 2Q12 from 10.5% in 1Q12. Aerospace core PBT margin was strong at 15%, compared to 13% in 1Q12 and 13.5% in 2Q11, owing to a favourable sales mix (higher heavy maintenance sales). Shipbuilding margins in the Marine segment also improved, despite an unfavourable fair value change of embedded forex derivatives in the S$880m Oman navy contract, which is denominated in Euros.

Our View

Record orderbook provides healthy earnings visibility. STE won close to an estimated S$2bn worth of new orders in 2Q12, as its orderbook expanded to record level of S$12.7bn at end-2Q12 from S$12.2bn at end-1Q12. About S$2.5bn of its orderbook will be recognised in 2H12.

Recommendation

Maintain BUY. Despite some acquisitions-related hiccups in the recent past, STE’s growth trajectory seems to be on track, driven by healthy order-win momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates marginally by about 1-1.2% to account for the above. Operating cash flows in 1H12 remained strong, driven by higher customer deposits, in line with healthy order wins. Interim dividend of 3Scts was declared, at par with 1H11 levels. Given visible earnings growth, strong balance sheet and healthy dividend yield of 5%, we maintain our BUY call. Our TP, which is based on the blended valuation methodology, is revised upwards to S$3.60 as our PE multiple is revised upwards to 18x to reflect mid-cycle valuations.

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