STEng – OSK DMG

Orderbook Hits New High

STE’s 4Q13 PATMI of SGD167.5m (+10.0% y-o-y), earned on the back of SGD1.94bn in revenue (+12.1% y-o-y), was slightly below expectation. Its orderbook reached a new high of SGD13.2bn, of which SGD4.3bn is expected to be delivered in FY14. Elsewhere, the outlook for all of its divisions, except land systems, is positive. Maintain BUY, with our DCF-based TP raised to SGD4.66 (WACC: 8.4%; growth: 0%).

Aerospace unit to perform. Singapore Technologies Engineering (STE)’s aerospace unit reported a PBT of SGD88.2m (+14.4% y-o-y) and revenue of SGD590.6m (+4.3% y-o-y) in 4Q14. The contracts announced in 4Q13 exceeded SGD780m, bringing the announced contract value to SGD2.3bn in total. Going forward, the group’s revenue is likely to be higher, with comparable profits, as its new operations in Guangzhou and Texas take time to ramp up while incurring more costs during their start-up periods. Its investment pact with Pensacola city in the US to develop a new airframe facility, as well as the initial portfolio of its aircraft leasing business, are expected to be finalised in FY14.

FY14 a better year for electronics, marine units. During the quarter, the electronics division reported a PBT of SGD46.7m (+27.8% y-o-y) and revenue of SGD529.8m (+18.7% y-o-y), while the marine unit booked a PBT of SGD47.1m (+28.4% y-o-y) and revenue of SGD377.9m (+48.6% yo-y). Going forward, both sectors are likely to report higher PBT and revenue in FY14, backed by a strong orderbook.

But downbeat on land systems. The land systems unit’s strong turnaround in 4Q13 – with 11.3% and 126.4% q-o-q jumps in revenue and PBT respectively – was due to a one-off gain from a property disposal. Still, its near-term outlook remains sluggish as macroeconomic conditions remain volatile and spending on capital equipment delayed.

Dividend payout ratio drops to 80%. While STE’s historical dividend payout ratio was c.90% of profit, FY13’s final dividend of SGD0.12 was only 80% due to a 30% withholding tax at its businesses overseas that restricts the flow of cash back to shareholders. Hence, the payout ratio will likely drop to 75% as the group aims to retain its overseas earnings to grow its businesses.

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