STEng – Kim Eng

Holding On after a Stellar Ride

3QFY12 results in-line, HOLD on price run-up. ST Engineering (STE) reported 9MFY12 PATMI of SGD424m, coming in at 73% of our full-year forecasts. 3QFY13 PATMI of SGD146m was a 9.5% improvement YoY, contributed by double-digit profitability growth in the Electronics (+SGD3.8m, +11%) and Land Systems (+SGD4.6m, +30%) segments. We leave our estimates largely intact, downgrading the stock to a HOLD as we believe STE is fairly valued at current price levels. Target Price remains at SGD3.78.

Orderbook still healthy, but no record this 3Q. STE’s orderbook stood at SGD12.5b this 3Q, just shy of the record SGD12.7b level announced in 2QFY12. SGD1.04b of new contracts were announced this quarter, with ST Aerospace’s MRO contracts carrying the bulk at SGD692m. The remaining contracts were previously announced: SGD166m from ST Electronics (Rail electronics, Sat-comms, sensor solutions) and SGD179m from ST Marine (Shipbuilding and Ship repair, including two OSVs).

Marine profit declines, Aerospace shows muted growth. STE’s overall 3QFY12 PBT growth of 11% was held back by a declining PBT from ST Marine (-2.8% YoY) and muted growth from ST Aerospace (+3.2% YoY). ST Marine’s lower overall PBT was caused by poorer Shipbuilding (-17.3% YoY) and Ship repair (-31.7% YoY) results. ST Aerospace had a significantly poorer PBT from its Maintenance & Modification segment (-18.3%).

Fairly valued – downgrade to HOLD. While results were in line with our expectations, the recent share price run-up has led to our downgrade of STE to a HOLD recommendation. Our valuation remains pegged to STE’s historical mean 19x FY2013 PER. STE’s strong balance sheet and cash-flows should still support dividend yields of ~5%, which existing investors can continue to enjoy. For now, we keep a look-out for catalysts which include bumper contracts that push its orderbook past record levels once again.


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