ST Engg unit secures $160m SAF contracts

ST Engineering’s land systems arm ST Kinetics yesterday said that it has secured $160 million worth of contracts from the Singapore Armed Forces (SAF).

The two four-year contracts are for the maintenance of SAF’s vehicles and the preservation of SAF’s fleet of equipment. Both commence immediately and the preservation contract comes with an option for a two-year extension.

ST Engineering said that the contracts are not expected to have any material impact on its FY2010 financials.

ST Kinetics’ Q3 results, announced along with the rest of the ST Engineering group on Tuesday, showed a slight increase in net profit to $22.7 million.

Turnover grew 28 per cent to $373 million from $291 million in Q3 2009, mainly due to higher project deliveries from its automotive division as well as more than doubled sales from its services, trading & others division.

Automotive turnover rose 37 per cent to $270 million for the quarter and is still ST Kinetics’ main business. But an unfavourable product mix from the segment resulted in lower profits in Q3.

Its munitions & weapon business group saw revenue fall 11 per cent to $70 million and these lower sales, coupled with foreign exchange losses, drove profits down too.

Stays on course to good finish

• 3Q net profit of S$130m (+8% y-o-y) in line; Group on track to meet our FY10 estimates

• Aerospace division contract win momentum remains steady, faster growth expected in FY11

• Revise TP to S$3.85 as we roll over valuations to FY11; maintain BUY for 15% return potential

On track to 6% EPS growth in FY10. 3Q10 net profit of S$130.2m (+8% y-o-y, +5% q-o-q), met 51% of our 2H-FY10 net profit estimate. Revenue came in at S$1.49b, up 10% y-o-y largely owing to higher deliveries of Terrex and Warthog armoured vehicles to the Singapore and UK armed forces, respectively. Despite the unfavourable product mix in Land Systems segment, Group PBT margin in 3Q improved to 10.7% from 10.4% in 2Q, as a result of higher margins in Aerospace and Marine divisions, partly driven by lower staff costs.

Aerospace should fire in FY11. Recovery in the airframe and engine MRO sector has been slow, as evidenced by the lack of sequential growth in Aerospace revenues, but we remain optimistic of a faster pace of growth in FY11. PTF conversions continue to provide stable base loads to STE’s hangars and chances are high that the eventual conversion pipeline for Fedex could be higher than 87 planes in the original contract. MRO order win momentum continues to be healthy as the Group has won S$370m worth of heavy maintenance contracts in 3Q10, in addition to an S$85m component and engine support contract with T’Way Air.

Maintain BUY, potential yield of ~4%. The group ended the quarter with an orderbook of S$10.8b (excluding about S$400m procurement contract) and we remain confident of our FY10-11 forecasts. Our TP is revised up to S$3.85 as we roll over valuations to FY11. A weaker USD can be a slight dampener, going forward.

ST Engg Q3 profit rises 8% to $130.2m

Turnover up 10% to $1.49b; all core divisions post improved results

SINGAPORE Technologies Engineering yesterday said its third-quarter net profit rose 8 per cent to $130.2 million from a year ago.

Higher sales from all four arms – aerospace, electronics, land systems and marine – lifted the group’s turnover by 10 per cent to $1.49 billion for the three months ended Sept 30.

Net profit for the quarter would in fact have risen by a larger 18 per cent if the Jobs Credit Scheme’s boost to Q3’s earnings last year was stripped out, Seah Moon Ming, group deputy CEO and president, defence business, said yesterday.

Earnings per share rose 30 cents from a year ago to $4.31.

In Q3, commercial sales made up 58 per cent of turnover for the group, which also supplies equipment to the Republic of Singapore Armed Forces (RSAF) and other military customers.

Its order book, which includes only a fifth of the RSAF Advanced Jet Trainers contract announced in September, stands at $10.8 billion. $1.2 billion of these orders are to be delivered in the current quarter.

The group’s cash and cash equivalents and short-term investments came to $1.63 billion as at end September, and its advance payments from customers was $1.4 billion.

All core divisions posted improved performance, but land systems and electronics contributed more to the group’s higher turnover in Q3.

For land systems, turnover jumped 30 per cent to $368 million thanks mainly to higher project deliveries in its automotive business, while the electronics sector’s sales grew 10 per cent to $338 million with more telematics systems sales and the completion of communication, software system and simulator projects.

More modest sales growth of 3 per cent to $486 million was reported by the aerospace sector which enjoyed higher engine sales, while the marine sector’s top line rose 4 per cent to $254 million on more commercial ship repair activity as well as higher engines repair activity and naval logistics management sales.

Net profit thus rose across all four business segments as well.

The group’s overall pre-tax profit margin held steady at 11 per cent for Q3, but aerospace and electronics slipped a point to 14 and 9 per cent respectively, while land systems margin fell two points to 8 per cent due to unfavourable product mix.

ST Engineering now expects, ‘barring unforeseen circumstances’, to achieve higher turnover and profit before tax for FY 2010 compared to FY 2009, group president and CEO Tan Pheng Hock said in a statement yesterday.

Its performance in the third quarter reflects the ‘gradually improving operating environment’, he added.

Before yesterday’s results announcement, ST Engineering’s shares closed seven cents up at $3.47.

ST Engg Q3 profit rises 8% to $130.2m

Turnover up 10% to $1.49b; all core divisions post improved results

SINGAPORE Technologies Engineering yesterday said its third-quarter net profit rose 8 per cent to $130.2 million from a year ago.

Higher sales from all four arms – aerospace, electronics, land systems and marine – lifted the group’s turnover by 10 per cent to $1.49 billion for the three months ended Sept 30.

Net profit for the quarter would in fact have risen by a larger 18 per cent if the Jobs Credit Scheme’s boost to Q3’s earnings last year was stripped out, Seah Moon Ming, group deputy CEO and president, defence business, said yesterday.

Earnings per share rose 30 cents from a year ago to $4.31.

In Q3, commercial sales made up 58 per cent of turnover for the group, which also supplies equipment to the Republic of Singapore Armed Forces (RSAF) and other military customers.

Its order book, which includes only a fifth of the RSAF Advanced Jet Trainers contract announced in September, stands at $10.8 billion. $1.2 billion of these orders are to be delivered in the current quarter.

The group’s cash and cash equivalents and short-term investments came to $1.63 billion as at end September, and its advance payments from customers was $1.4 billion.

All core divisions posted improved performance, but land systems and electronics contributed more to the group’s higher turnover in Q3.

For land systems, turnover jumped 30 per cent to $368 million thanks mainly to higher project deliveries in its automotive business, while the electronics sector’s sales grew 10 per cent to $338 million with more telematics systems sales and the completion of communication, software system and simulator projects.

More modest sales growth of 3 per cent to $486 million was reported by the aerospace sector which enjoyed higher engine sales, while the marine sector’s top line rose 4 per cent to $254 million on more commercial ship repair activity as well as higher engines repair activity and naval logistics management sales.

Net profit thus rose across all four business segments as well.

The group’s overall pre-tax profit margin held steady at 11 per cent for Q3, but aerospace and electronics slipped a point to 14 and 9 per cent respectively, while land systems margin fell two points to 8 per cent due to unfavourable product mix.

ST Engineering now expects, ‘barring unforeseen circumstances’, to achieve higher turnover and profit before tax for FY 2010 compared to FY 2009, group president and CEO Tan Pheng Hock said in a statement yesterday.

Its performance in the third quarter reflects the ‘gradually improving operating environment’, he added.

Before yesterday’s results announcement, ST Engineering’s shares closed seven cents up at $3.47.

Currency concerns

What’s New

• With the US dollar at an all‐time low, we reiterate that a weak greenback is negative for ST Engineering. The recovery of the aerospace market has also been relatively muted. However, ST Engineering’s (STE) dividend yield is still attractive at 3.9%. Maintain HOLD and target price of $3.15.

Our View

• The US dollar has slid by 6% against the Singapore dollar over the past three months, weakening to an all‐time low of S$1.317. We note that the majority of STE’s commercial contracts are in US dollars, while a significant cost base is in Singapore dollars. STE had previously guided that every one cent decline in the exchange rate would translate to a S$1.3m slide in earnings.

• Furthermore, we continue to expect the aerospace market to lag in its recovery. Typically, the first positive impact on the MRO industry will come to line maintenance and eventually to heavy maintenance, which ST Aerospace is focused on. While we had anticipated a gradual pickup in this division, ongoing concerns over the US economic recovery and a lack of new orders suggest that this business will take longer to get back up to speed.

• STE’s last reported orderbook at 2Q10 was $11.3b, providing a baseload for the next three years. The company expects to convert about $2.2b in 2H10, which reinforces our expectation of 4.6% revenue growth for the full year. However, we may see a gradual dwindling of its orderbook for the reasons stated above, unless there is a pickup in overall business. Its recent contract to procure trainer aircraft and ground solutions to the Republic of Singapore Air Force for $543m is expected to have thinner margins due to the high equipment content.

Action & Recommendation

Our FY10 earnings forecast stands at $476.1m, which is slightly below consensus but still in line with management’s guidance. We are leaving our forecast unchanged, as the forex decline should be capped at around $10‐15m for now. Our forecast also implies healthy earnings growth of 7% and a dividend yield of 3.9%. STE’s stock price has held steady over the past few months, but at 21x FY10F earnings, we believe the stock is fully valued. Maintain HOLD.