STEng – DBSV
Strong finish to the year but dividend cut a surprise
- 4Q13 results in line, earnings up 10% y-o-y
- Strong order wins reported in 4Q13; orderbook at record levels of S$13.2bn underpins earnings visibility
- Cuts dividend payout ratio to 80%; nevertheless net cash levels remain elevated at S$692m and can be invested for growth in US operations
- Maintain BUY with lower TP of S$4.30
After an uninspiring performance in 3Q, STE reversed the trend with a solid set of numbers for 4Q13, with net profit up 10% y-o-y to S$167.5m on the back of 12% rise in revenue to S$1.9bn. Except the Land Systems sector, all other divisions reported y-o-y
growth in revenues, led by the Marine segment, where revenues were up 48% y-o-y on the back of strong project deliveries. PBT margins were also maintained across sectors, with Group PBT margin of 11.1% flattish compared to 4Q12 and 3Q13. However, for the full year-FY13, earnings growth was only 1% due to losses from “Others” segment – largely unprofitable non-core projects undertaken by ST Synthesis – and the impairment charge on its Ropax vessel, which has since been chartered out to a Canadian cruise ferry line for 3+7 years term. Without these items, we believe FY13 net profit of S$581m could have been up almost 6% y-o-y.
Earnings outlook remains encouraging. Order wins were buoyed in 4Q13, with all segments reporting new contract wins in the quarter that were higher than the usual run rate. As a result, STEclosed FY13 with a record orderbook of S$13.2bn despite strong
revenue recognition in 4Q13.
Dividend cut will affect sentiment in near term, but doesn’t change fundamentals. STE cut its dividend payout ratio from 90% to 80% in FY13 (final dividend of 12Scts + 3Scts interim already paid out) as most of the cash flow growth is trapped in the US operations due to the 30% withholding tax hurdle. However, this does not take away STE’s cash generation ability as it ended the year with a higher net cash balance of S$692m. The US operations will continue to invest the cash in expanding its capabilities in aircraft cabin reconfiguration and VIP completions, and is also exploring the possibility of setting up a MRO facility near Pensacola Airport. While we cut our TP to S$4.30 to account for the lower dividend payout and dividend growth expectations over the next 2 years, and expect some negative reaction to stock price in the near term given that STE is traditionally considered a steady dividend stock, we believe this should provide opportunities to accumulate a quality company with leverage to the global recovery story along with 4%+ yield.