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.
  

What’s New

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.

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.
  

What’s New

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.

Back-end Loaded Year

In line with expectations, ST Engineering reported 1Q14 results with SGD137.2m PATMI (+2.4% y-o-y) on the back of SGD1.55bn revenue (+0.5% y-o-y). 1Q results was hit by recognition timing issues in Electronics and Land System business. We expect these segments to pick up as this will be a back-end loaded year. Maintain BUY with TP unchanged at SGD4.66 based on DCF (WACC: 8.4%; growth: 0%).

1Q14 results helped by wage credit scheme. Growth of PBT for the quarter would have been flat instead of a 6% y-o-y increase, if it had not been for one-off other income which jumped 85% y-o-y to SGD17.4m. These was likely due to maiden contributions from the yearly government wage credit scheme which will end in 2016.

Marine shine and Aerospace grow. Marine growth was the most outstanding of all divisions growing 27% y-o-y to SGD323m, largely due to the recognition of the Oman Navy contracts. Aerospace was the second growth sector, growing 5% y-o-y to SGD501m while the other two sectors shrunk. Going forward, we expect Marine PBT growth to normalize to single digits and Aerospace PBT growth rate to hover at the same levels.

Electronics and Land System were weak. Electronics revenue fell the most by 13% y-o-y to SGD369m while Land Systems fell 6% y-o-y to SGD325m. We believe that there is no cause for panic as it is a project revenue recognition timing issue for Electronics and Land System’s defense business. We expect more project to be completed in subsequent quarters and revenue growth should return. Land System’s commercial business continued to face weaknesses in 1Q14 due to lukewarm economic conditions in China but should see more optimism moving forward.

Record order book to provide downside cushion. Most importantly, order book continue to make new record high, hitting SGD13.4bn (+3% y-o-y). We estimate that the current order book which generally drive 60% to 70% of the annual revenue is sufficient to cover for the next three years, providing downside cushion.

Back-end Loaded Year

In line with expectations, ST Engineering reported 1Q14 results with SGD137.2m PATMI (+2.4% y-o-y) on the back of SGD1.55bn revenue (+0.5% y-o-y). 1Q results was hit by recognition timing issues in Electronics and Land System business. We expect these segments to pick up as this will be a back-end loaded year. Maintain BUY with TP unchanged at SGD4.66 based on DCF (WACC: 8.4%; growth: 0%).

1Q14 results helped by wage credit scheme. Growth of PBT for the quarter would have been flat instead of a 6% y-o-y increase, if it had not been for one-off other income which jumped 85% y-o-y to SGD17.4m. These was likely due to maiden contributions from the yearly government wage credit scheme which will end in 2016.

Marine shine and Aerospace grow. Marine growth was the most outstanding of all divisions growing 27% y-o-y to SGD323m, largely due to the recognition of the Oman Navy contracts. Aerospace was the second growth sector, growing 5% y-o-y to SGD501m while the other two sectors shrunk. Going forward, we expect Marine PBT growth to normalize to single digits and Aerospace PBT growth rate to hover at the same levels.

Electronics and Land System were weak. Electronics revenue fell the most by 13% y-o-y to SGD369m while Land Systems fell 6% y-o-y to SGD325m. We believe that there is no cause for panic as it is a project revenue recognition timing issue for Electronics and Land System’s defense business. We expect more project to be completed in subsequent quarters and revenue growth should return. Land System’s commercial business continued to face weaknesses in 1Q14 due to lukewarm economic conditions in China but should see more optimism moving forward.

Record order book to provide downside cushion. Most importantly, order book continue to make new record high, hitting SGD13.4bn (+3% y-o-y). We estimate that the current order book which generally drive 60% to 70% of the annual revenue is sufficient to cover for the next three years, providing downside cushion.