Modest growth ahead

Low teens growth. Singapore Technologies Engineering (STE) posted 4Q07 results with turnover and net profit rising tepidly to S$1.29b (+2.8% YoY) and S$141m (+7% YoY), respectively. On full year basis, revenue crossed the S$5b (+12.6% YoY) mark for the first time while bottomline grew 13% YoY to S$503.5m. The measured performance was partly due to muted investment gains and lower contribution from associates and JVs. STE also declared a final dividend of 14.88 cents, bringing total payout to 16.88 cents for FY07.

Starting engine overhaul. STE recently broke into the engine overhaul space with STATCO, a 80-20 JV with the Xiamen Aviation Industry Co. STE’s 80% stake gives it management control over the S$78m facility. STATCO will start maintaining some models of the CFM-56 engines that have a large installed base among Chinese Airlines. Overall, we anticipate the Aero division to continue to be the diadem of the group and forecast a robust 15% YoY revenue growth on the back of strong MRO trends.

Draggy SOE project. BT revealed that the S$1.5b SOE project to outsource the front end IT needs of the entire public sector met obstacles with the One Team consortium comprising NCS and IBM. We view this positively as it may swing the favour to the STE’s consortium. For FY08, we estimate revenue growth of 11% for STE’s Electronics division as it adds pursuit of government jobs on top of its commercial endeavours. We have not factored in this project win but expect that winning this SOE contract will be the earnings and share price catalysts.

Foggy roads and seas. Despite a better than expected 23% YoY growth in revenue for the marine sector, the expiry of major contracts without order book replenishment in sight will cause this division to be lacklustre. Land systems will continue to grow, albeit at a slower pace, and with lumpy contributions primarily from defence jobs.

Get defensive. We have tweaked our FY08/09 figures to cater to management’s guidance. Backed by S$9.5b in order book and a strong dividend yield of 5% for FY08, we expect STE to give a modest performance despite the turbulent market conditions. However, our fair value is lowered to S$3.92 based on the same 21x FY08 EPS due to growth moderation. As such, we downgrade to a HOLD. Securing big short term contracts like the SOE may trigger a re-rating.

ST Engg net up 13%, sees slower growth this year

Profit hits $503.5m last year; it expects single-digit growth this year

SINGAPORE Technologies Engineering expects to see growth slow this year, despite posting double-digit year-on-year growth in both top and bottomline for the year ended December 2007 and breaking the $5 billion mark in turnover for the first time.

The group expects to achieve ‘modestly higher turnover and profit before tax’ for FY2008 compared to FY2007, it said.

‘We’ve used the word ‘modestly’ before. It indicates single digits, somewhere in the middle’, said Tan Pheng Hock, group chief executive.

ST Engg achieved 13 per cent year-on-year growth in net profit to $503.5 million last year, as revenue also rose 13 per cent to $5.05 billion.

Group profit before tax (PBT) would have been $15 million higher if not for the weak US dollar, Mr Tan said. ST Engg earned 31.5 per cent of revenues from the US, 49.2 per cent from Asia, and the rest from Europe and elsewhere.

With the US slowdown, ‘it’s still very uncertain and too early to know what will happen, other than what is in our contracts. The next three months we can tell you, six months would be hard’, said Mr Tan.

Orders as at end-2007 stood at $9.49 billion – 29 per cent up from a year ago – with about $3.49 billion expected to be delivered this year. This figure does not include the several hundred million dollars worth of contracts announced this quarter.

Earnings per share rose 12 per cent to 16.95 cents. The group has proposed a final dividend of 14.88 cents per share, which included an earlier interim dividend of two cents, meaning it has maintained its practice of fully paying out earnings.

Sector-wise, ST Aerospace saw PBT rise 12 per cent to $341.2 million, as revenues grew a tenth to $1.84 billion. The unit plans to grow its Total Aviation Support programme, as well as its customer base at new facilities in Shanghai and Panama.

It looks unlikely to restart its airframe maintenance work in Europe, which was divested in 2006 due to lack of volume. European national airlines, unlike US ones, do maintenance work in-house, said Tay Kok Kiang, president of ST Aero.

And in Eastern Europe, where ST Aero had previously thought of investing, low-cost carriers are widely dispersed with just a few planes each. Each country has its own airframe facility, it being an easier business to enter into than components or engines, where ST Aero will focus for now, he said.

ST Electronics saw revenues cross $1 billion with 8 per cent annual growth, with PBT growing 10 per cent to $115.3 million. Besides e-government and transport management services, the unit is also banking on its digital media venture into movies.

iDirect, the satellite communications arm, was ‘slightly weaker’ in 2007, as it was investing in new products, said Seah Moon Ming, president of ST Electronics. It will prove stronger in 2008, thanks partly to more government sales.

Government sales are a key new area across the group, added Mr Tan.

The land systems arm saw a 14 per cent rise in PBT to $80 million, as turnover rose 17 per cent to $1.19 million. It will focus on growing the specialty vehicles business, not only in its current markets of China and the US, but also in the Middle East, said Mr Tan.

ST Marine did better than expected due to ‘outstanding shiprepair performance’, with PBT growing 22 per cent to $96.6 million and revenue up 23 per cent to $865 million. However, it expects a poorer performance in 2008 that will pull down group earnings.

Uncertainty looms

• Below expectations. FY07 net profit of S$504m (+13% yoy) was 6% below our expectations but in line with consensus (S$511m). 4Q07 net profit of S$146m (+11% yoy) was 18% below our estimate but in line with consensus. The shortfall was due to lower-than-expected PBT from all divisions except Marine. 4Q07 sales improved 3% yoy to S$1.3bn.

• Aerospace and Electronics taking off slower than expected. Aerospace’s 4Q07 PBT dipped 5% yoy to S$87m, 30% below our expectations due to lower-thanexpected redeliveries of projects. We believe margin pressure could intensify as FY07 PBT margins were flat at 18%, below our expected 19.6%. Although 4Q07 Electronics PBT was up by 25% yoy to S$37.4m, the figure was 45% below our expectations due to weaker-than-expected earnings from iDirect from high development costs to upgrade products.

• Exceptional quarter for Marine but outlook is bleak. Marine’s 4Q07 PBT jumped 74% yoy to S$41m, thanks to higher ship repair jobs and investment income recognised. However, management is bearish over Marine’s FY08 revenue and PBT due to the completion of the Singapore frigate programme and execution of lower shipbuilding jobs by VT Halter Marine, US.

• Single-digit growth in FY08. Management indicated that FY08 growth could be a modest single digit on the back of the uncertain global economy and weakening US$. We are cutting our earnings estimates by 6-8% for FY08-09 to account for lower margin assumptions in Aerospace and slower earnings growth in Electronics and Land divisions.

• Maintain Neutral; target shaved from S$4.36 to S$4.01, still based on blended valuations, following our earnings downgrade. STE proposed a final dividend of 14.9 Scts, bringing FY07 dividend to 16.9 Scts for a yield of 4.6%. While we are comforted by its strong order book of S$9.49bn, we remain cautious, given the weakening US$ and softening US market which could hurt its US operations.

Loading up on contracts

S$434m contracts for Marine, Aerospace and Land Systems

ST Engineering’s Aerospace, Land and Marine divisions have secured five contracts worth a total of S$434m.

S$232m (US$160m) contract extension from a UK airline. The contract is awarded by UK-based Flybe to ST Aerospace Solutions (Europe) to support component maintenance and management requirement of Flybe’s Bombardier Dash 8 Q400 aircraft, in addition to the current Q400 fleet. The new contract includes additional aircraft and an extension of the existing contract till 2016.

S$87m contract for engine maintenance from a South Africa airline, Comair, for comprehensive engine maintenance and engineering support of the airline’s 20 CFM 56-3 engines for eight years.

Two contracts for Land Systems worth S$87.3m. The first contract of S$44.8m (US$32m) was awarded by a Middle Eastern customer for the supply of Land Systems’ patented 120mm super rapid advanced mortar systems with delivery scheduled for 2011. The second contract of S$42.5m was awarded by the UK Ministry of Defence for the supply of 40mm ammunition. Delivery is slated for 2009.

S$28m contract for Marine division from Norway-based Waveship AS, for outfitting work on its seismic research vessels. Delivery is expected in 2H08.

Fantastic order wins in February. The ST Engineering group has clinched new contracts worth about S$560m for all divisions in the month of February.

Valuation and recommendation

Maintain Neutral and target price of S$4.36, still based on a blending of 20x CY09 EPS, DCF value of S$4.64 (WACC of 7.8%), dividend yield of 4.5% and DDM valuation of S$4.01. Our earnings estimates remain unchanged and we continue to be wary of the outlook of the US economy which could potentially hurt ST Engineering’s Land Systems and Electronics operations in the US.