Boosters from Singapore Airshow

Company Overview

ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.

• 21% increase in PATMI on 1.5% improvement in EBITDA margins

• Associates contributions boosted by biannual Singapore Airshow

• Order Book of S$12.2bn (2.0X annual sales)

• Maintain Accumulate with unchanged TP of S$3.37

What is the news?

STE reported profit growth of 21% as compared to the same quarter a year ago. EBITDA margins improved by 1.5ppt largely due to more favourable product mix and provisions related to the ROPAX contract termination that was made in 1QFY11. The Group’s result was boosted by the biannual Singapore Airshow that was held in the quarter, which accounted for majority of the S$10.8mn increase in PBT contributions from its Associated companies. Order book was held steady at S$12.2bn (2.0X annual sales).

How do we view this?

The results were strong, considering that first quarter is usually a weaker quarter for STE, and had already formed 24.8% of our full year estimates. STE’s order book of S$12.2bn is probably above S$13bn, if the recent contract wins in April were included (See: Defence contracts lead the way!, dated 13th April 2012).

Investment Actions?

We kept our forecasts unchanged and maintain our Accumulate rating on STE. STE’s earning yield spreads and P/E multiples remain below historical averages, reflecting undervaluation in this defensive stock, in our view.

Boosters from Singapore Airshow

Company Overview

ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.

• 21% increase in PATMI on 1.5% improvement in EBITDA margins

• Associates contributions boosted by biannual Singapore Airshow

• Order Book of S$12.2bn (2.0X annual sales)

• Maintain Accumulate with unchanged TP of S$3.37

What is the news?

STE reported profit growth of 21% as compared to the same quarter a year ago. EBITDA margins improved by 1.5ppt largely due to more favourable product mix and provisions related to the ROPAX contract termination that was made in 1QFY11. The Group’s result was boosted by the biannual Singapore Airshow that was held in the quarter, which accounted for majority of the S$10.8mn increase in PBT contributions from its Associated companies. Order book was held steady at S$12.2bn (2.0X annual sales).

How do we view this?

The results were strong, considering that first quarter is usually a weaker quarter for STE, and had already formed 24.8% of our full year estimates. STE’s order book of S$12.2bn is probably above S$13bn, if the recent contract wins in April were included (See: Defence contracts lead the way!, dated 13th April 2012).

Investment Actions?

We kept our forecasts unchanged and maintain our Accumulate rating on STE. STE’s earning yield spreads and P/E multiples remain below historical averages, reflecting undervaluation in this defensive stock, in our view.

1Q12 EARNINGS IN LINE

•Gross margin gain, PATMI up 20%

•Marine – most improved segment

•Order book remains healthy at S$12.2m

1Q12 financials in line with market expectations

ST Engineering (STE) 1Q12 revenue slipped 2% YoY to S$1.5b but PATMI jumped 21% higher to S$134m. This set of results is aligned with the market’s expectations, with both its 1Q12 revenue and PATMI meeting 24% of consensus and our full-year estimates. STE’s higher PATMI in 1Q12 can primarily be attributed to two factors – 1) a 2.2ppt gain in gross margin to 21% and 2) a 173% jump in share of profits of associated companies which, according to management, was boosted by contribution from its associated company that organized the biannual Singapore Airshow.

Most segments remain healthy

STE’s Aerospace and Electronics segments displayed stable growth in 1Q12. Aerospace and Electronics revenues and grew 1% and 2% respectively to S$456m and S$452m, while their pre-tax profits 5% and 4% to S$60m and S$34m. However, STE’s Land Systems revenue and pre-tax profit contracted 11% and 7% respectively to S$317m and S$24m. This contraction was due to the completion of deliveries of Warthog vehicles to the British military in 1H11. On a positive note, Marine segment’s pre-tax profit rose 20% to S$29m, despite recording 10% lower revenue of S$244m. The Marine segment’s improved margin was the result of a more favourable sales mix, coupled with loss provisions made in 1Q11 to a Ropax ferry shipbuilding contract with Louis Dreyfus Armateurs.

Maintain buy

Management remains optimistic and maintained its guidance of revenue and pre-tax profit growth for FY12. STE’s recent strong flow of new orders should provide investors ample confidence on its ability to replenish, or even grow, its healthy order book of S$12.2b at end-1Q12. We maintain our fair value estimate of S$3.50/share and BUY rating on STE.

ST Engg Q1 profit up 20.9% to $134.37m

ST Engineering on Wednesday posted a 20.9 per cent increase in year on year earnings to $134.37 million for the first quarter ended March 31, 2012.

Turnover dipped 1.7 per cent to $1.54 billion from a year ago. Revenue of its aerospace and electronics sector was flat, while land systems and marine sectors registered lower revenue, down 11 per cent and 10 per cent, respectively.

The group posted earnings per share of 4.39 cents, up from 3.65 cents a year ago.

4 business pillars, 1 growth model

A mega contract in the bag. ST Engineering’s (STE) marine arm, ST Marine, has bagged its largest order in recent years – an S$880m contract to design and build four patrol vessels for the Royal Navy of Oman. This was welcome news, coming on the back of ST Kinetic’s recent blacklisting by India for its alleged involvement in a bribery scandal. It also confirms that STE’s reputation as a defence engineering specialist is untarnished.

Multi-pillar earnings growth model. ST Aerospace, STE’s largest revenue contributor, also reported significant contract wins in 1Q12 that amounted to S$550m. The increase in defence expenditure by the government and its push for a more efficient public transportation system should augur well for ST Electronics and ST Kinetics as well. Taken together, these factors would continue to drive STE’s growing orderbook, thereby providing earnings visibility for the near future.

Healthy dividend payout. STE has a strong history of dividend payment, even in the absence of a formal policy. It typically pays out approximately 90% of its earnings. We do not expect any major change to this assumption and believe that its yield of 5% is sustainable.

Reputation untarnished, upgrade to Buy. We believe that the latest contract win by ST Marine reaffirms STE’s reputation as a global defence engineering specialist. Its multi-pillar strategy should also offer comprehensive support for growth, prompting us to raise our forecasts to account for a more visible earnings outlook, especially from ST Marine. Our target price thus goes up from $2.88 to $3.60, pegged at the historical PER mean of 19x FY12 earnings and providing upside of 16% (including FY12F dividend of $0.17). Upgrade to Buy.