STEng – Maybank Kim Eng
No catalysts in sight
- 1Q14 net income of SGD137.2m (+2.4% YoY), tracking below our projected growth of 6.8% for the full year.
- VT Halter Marine no longer on the shortlist for the major Offshore Patrol Cutter contract. Potential catalyst lacking.
- Maintain HOLD with unchanged TP of SGD4.00, pegged to 20x FY14E.
ST Engineering (STE) reported a fairly weak set of 1Q14 results, with net income growth of 2.4% YoY to SGD137.2m tracking below our projection of 6.8% YoY for the full year. Lower net profit contributions were seen from the Electronics (-2% YoY) and Land Systems (-22% YoY) divisions, but this was offset by improvements at the Marine division (+21% YoY). The Aerospace segment, the largest profit generator, posted flat profits. During the quarter, STE secured more than SGD1b of contracts (Electronics: SGD581m, Aerospace: SGD460m), bringing its orderbook to SGD13.4b (end-2013: SGD13.2b) or approximately two times its annual sales. Management expects revenue and PBT for 1H14 to be comparable to the same period last year, but anticipates an overall increase for the full year.
What’s Our View
On the positive side, STE seems to be navigating the tight labour market in Singapore well, with management saying annual wage increases remain manageable. But the US sequester appeared to have a negative impact on it, as evidenced by the slow sales of satellite products in the country. Furthermore, with VT Halter Marine no longer on the shortlist for the major Offshore Patrol Cutter contract for the US Coast Guard, there is now no stock catalyst in sight. With the payout ratio expected to decline to 75% over our three-year forecast period, we estimate dividend yield to be only 3.9%, relatively unattractive compared with 4.5% for its Singapore Aviation Services peers. Maintain HOLD with TP unchanged at SGD4.00, pegged to 20x FY14E.