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
  

Highlights

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.

Our View

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.

Recommendation

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.

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
  

Highlights

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.

Our View

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.

Recommendation

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.

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.