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.

Quality stock

• Net earnings below expectations but operationally in line. 3Q07 net earnings of S$125m (+9% yoy) were 17% below our expectation and 11% below consensus due to lower investment gains and interest income. 9M07 earnings account for 67% of our full-year estimate. Operating profits, however, were exactly within expectations. EBITDA and EBIT grew 13% yoy to S$180m and S$144m respectively. Sales rose 7% to S$1.2bn, led by a stronger Marine division.

• Aerospace margins shaped up; expect stronger 4Q07. 3Q07 pretax margin rose to 19% from 17% in 3Q06 thanks to a better product mix including redeliveries of two PTF aircraft to Boeing and UPS. The margin improvement was also helped by a turnaround at SAS Components. 3Q07 revenue was flat at S$443m due to the timing of deliveries but 4Q07 could be boosted by more deliveries.

• No growth for first the time in Land Systems. 3Q07 PBT of S$14.5m (down 20% yoy) was a contrast to the strong growth achieved in the previous three quarters. The weaker performance was due to higher R&D spending, lower sales and the product mix. Softness in the US housing market also affected the specialty vehicle business. Management believes the slowdown in the US could continue in 4Q07.

• Outlook remains positive, dividend yield sustained. Management has guided for higher PBT for Aerospace, Electronics and Land Systems in FY07 while Marine earnings are expected to be comparable to FY06. We believe the record-high order book of S$9.91bn and consistent earnings growth (3-year CAGR of 14%) will sustain its dividend yield of 5%.

• Maintain Outperform, target price raised from S$S4.10 to S$4.36, still based on blended valuations. Our earnings estimates remain intact on expectations of a stronger 4Q07. We have rolled forward our P/E valuation to CY09, which raises our target price to S$4.36. The stock’s defensive qualities stand out in the current market with a prospective dividend yield of 5% and ROE of 33% vs. peers’ (SCI and Keppel) averages of 3% yield and 23% ROE. Key risks include a weakening US$ and a slowdown in the US which could hurt its US operations.

ST Engg Q3 earnings rise 9.1%

Results boosted by earnings in the group’s marine and aerospace divisions

SINGAPORE Technologies Engineering (ST Engg) yesterday reported a 9.1 per cent year-on-year rise in third-quarter net profit to $125.5 million, thanks to improved earnings in its marine and aerospace divisions.

Revenues for the group rose 6.6 per cent year on year to $1.24 billion for the quarter.

While this is the first time this year that the group’s quarterly earnings growth has dipped into single digit, chief executive Tan Pheng Hock said the results were despite a fall in investment and interest income of nearly $20 million, due to a weaker interest rate and gains from divestments last year.

Core businesses are doing well, with Ebit (earnings before interest and tax) growing by a fifth during the quarter and return on equity improving to 8.4 per cent, Mr Tan said.

But the housing market slowdown in the United States has had ‘some impact’ on ST Engg’s specialty vehicles business there, he said.

Though the unit saved about half a million dollars from synergistic benefits through acquisitions, the slowdown has eroded these savings, he said.

The strategy is now ‘to go into military vehicles, which we have never entered before and are new to, and to export to markets like Latin America’, said Mr Tan.

Research and development (R&D) expenses also led to higher costs at the Land Systems division, which saw revenue dip slightly to $267 million and profit before tax (PBT) fall by a fifth to $14.5 million, he said.

Notwithstanding the above, the division’s results will improve going forward, Mr Tan said.

ST Aero, the group’s aerospace division, saw revenue remain flat year on year at $443 million, though PBT grew 10 per cent to $83.9 million.

This was thanks to better sales mix in the Aircraft Maintenance and Modification business, but offset by reduced investment income from the Engineering and Materials Services unit.

ST Marine saw revenue rise by 38 per cent to $256 million, thanks to significantly higher turnover from shipbuilding in the US, and from ship conversions.

The segment’s PBT increased by 7 per cent to $19.7 million, offset by higher administrative expenses.

The electronics sector saw a 5 per cent growth in revenue to $237 million, though PBT stayed flat at nearly $30 million.

The group’s earnings per share rose 8 per cent year on year to 4.24 cents for the third quarter. Its share price closed at $3.78 yesterday.

Mr Tan also said the group had won a landmark project in Saudi Arabia for an integrated traffic management and security system, which would prime it for further contracts in the Gulf region.

ST Engg’s order book now stands at $9.91 billion, with $1.09 billion to be delivered by the end of the year.

ST Engg casts its eyes on China growth

Group’s China revenue may hit present US level within 5 years: CEO

IF chief executive Tan Pheng Hock is right, Singapore Technologies Engineering (STE) could see China contribute as much to group revenues within five years as the United States does now. This would be no mean feat, seeing as Mr Tan expects to sell more than US$1 billion worth of products and services in the US this year.

‘With what I want to do in China… in maybe five years, if I can, I will be like VTS,’ said Mr Tan in a recent interview, referring to the group’s US unit, Vision Technologies Systems.

Growth will come mainly from the aerospace and specialty vehicles units, where the group is planning to ramp up capacity and, in the longer term, from the electronics unit. Meanwhile, the marine division currently has no activities in China, but is looking to acquire or set up a shipyard soon.

STE has no defence-related sales in China because it does not want to jeopardise its relationship with the US military, a major customer, Mr Tan has previously noted.

While STE does not sub-categorise revenues from Asia because of the sensitivity attached to sales in Singapore, where the Ministry of Defence is a major customer, Mr Tan said Singapore and mainland China contribute the bulk of group sales in Asia, which reached $1.54 billion for the first half of 2007.

Operations in China started seven or eight years ago when the electronics division started designing intelligent buildings like the Shanghai Museum, but really started expanding only in 2004, when ST Aero formed a joint venture with China Eastern Airlines in the airframe maintenance market. Today, ‘China would have reached a few hundred million in revenues’, said Mr Tan.

‘The bottom line today is not significant. It is profitable but does not have a material impact on our bottom line,’ he said.

Today, the aerospace JV, called Shanghai Technologies Aerospace Company (Starco), is profitable, as are Beijing Zhonghuan Kinetics (BZK) and Guizhou Jonyang Kinetics (GJK), which were set up in 2003 and 2005 respectively to sell trucks, trailers and other specialised vehicles.

Increasing air travel in China is driving a ‘huge demand for aircraft’ and a ‘need for total aviation support’, said Mr Tan. Starco presently serves five Chinese low-cost carriers – Spring Airlines, Okay Airways, China United, United Eagle and Juneyao Airlines – as well as the larger Shanghai-based China Eastern. The work is still purely in airframe maintenance, but Mr Tan believes Starco – which is expanding its hangar facilities at Pudong International Airport to fit three more aircraft – can broaden sales into engine and component maintenance.

Meanwhile, the group will ‘pump money’ into GJK and BZK to upgrade production processes. The two units are now in ‘tier 3’, grouped with state-owned vehicle manufacturers, he said, but beneath the tier 2 manufacturers from Japan and Korea, and the tier 1 companies like Caterpillar and Kobelco. These high-end companies serve the major cities where massive highways are being built, while the likes of GJK serve ‘small inner cities’ and target ‘local community developments’.

As for electronics, growth will come from demand for mass rapid transport (MRT) farecard and communication systems, which STE helps to design. According to Mr Tan, many coastal cities are developing MRT systems, but the projects are not yet at the stage where STE can contribute, because the infrastructure and the train bodies are tendered out before work begins on the electronic systems.

Mr Tan also said that he is looking to acquire an established shipyard in China. Yards are busy and prices are high, but ‘if we don’t go in now, the market will keep going up’, he said. STE’s second option is to acquire a yard that is currently under construction, failing which it will consider building its own.

Another challenge is to find a local partner, which is important for success in China. The problem is that coastal cities tend to be expensive to do business in, and so rich that they may not need Singaporean investment, which means STE will have little bargaining power. ‘What China wants now is management skills and processes. Money is no issue and even technology is less of one because they can buy it. We need to look for places where people will want us, where a local partner can use our capabilities,’ he said.

Other things to consider include proximity to shipping routes, and weather – too far north, it gets cold and costs run higher.

But Mr Tan’s biggest question about China is whether to run the outfit under a strong brand and a single leader, just as VTS in the US is run by retired US general John Coburn, or as separate companies under distinct province heads.

In China, different provinces are like different countries – provinces compete for investment against each other – so a manager who has good relationships with people in one province might be a poor choice to lead the business in another province. ‘If the leader were Singaporean it would be less of an issue, which may mean each province needs a local head as opposed to our having a China head,’ Mr Tan said.

Related to this is whether to have a single ‘big’ MNC brand, or to be seen as ‘pieces’. ‘If you’re big, people will watch and question your movements. People might come talk to you, but remember I want to be outside the radar screen, to be able to choose who I want to acquire, rather than have to say ‘No’. I want to manage sensitively and grow in my own way,’ he said.

Coming from STE, that is a familiar refrain. They once said the same thing about their US operations.

STE Q2 earnings rise 12% to $122.8m

HELPED by strong performance in the aerospace and land systems divisions, Singapore Technologies Engineering (STE) yesterday posted a 12 per cent year-on-year increase in second-quarter net profits to $122.8 million. Revenue for the three months to June 30 grew 22 per cent to $1.3 billion, helped by growth in all four divisions.

First-half net profit was 16.8 per cent higher at $231.6 million and revenue rose 21.7 per cent to $2.52 billion. H1 earnings per share was 7.84 cents, up from 6.78, and the board approved an interim dividend of 2 cents per share.

The group’s net profit margin for the second quarter declined due to a fall in investment and other income, according to acting chief financial officer Raphael Chin. Earnings before interest and tax (Ebit) actually rose by 39 per cent.

STE’s order book stood at $9.56 billion at the end of June 2007, slightly lower than a quarter ago. About $1.88 billion of this will be delivered in 2H07.

‘We are in a very strong position at this point,’ said chief executive Tan Pheng Hock. ‘You should be surprised that despite us having no major contract announcements last quarter the order book went down only marginally.’

STE’s aerospace unit saw second-quarter revenue rise 11 per cent year-on-year to $490 million, while net profit rose 14 per cent to $69.5 million.

SAS Component, a Denmark-based aircraft components unit acquired almost two years ago, turned profitable in 2Q07, said Mr Tan. It is the last of STE’s recent acquisitions to do so. The division also started expanding facilities and services – it is adding three hangars at Pudong International Airport in Shanghai and one at Seletar in Singapore.

The electronics arm saw revenues rise 29 per cent to $270 million, while net profits rose 2 per cent to $19.9 million. However, Mr Tan said this was due to a gain on investment last year – the unit’s Ebit actually rose by over 50 per cent.

Land Systems saw revenue rise 37 per cent to $285 million, while net profit more than doubled to $22 million. This was thanks to stronger deliveries of defence vehicles like the Bionix II and Bronco and of specialty vehicles like construction equipment and trucks.

ST Marine grew revenue 32 per cent to $220 million, while net profit declined 11 per cent to $13.9 million.

The group maintains its guidance of higher full-year turnover and pre-tax profit. It also expects revenue and profit before tax for the second half to be higher than those in the first.

Mr Tan said the group plans to invest in research and development on products, which will raise expenses.

He also said the US’ sub-prime worries do not directly affect STE’s operations there, except VT LeeBoy, which sells vehicles used to pave peripheral roads in housing estates. ‘It will definitely impact the LeeBoy business, but not a lot.’

But the credit crunch also means STE’s triple-A credit rating is ‘especially valuable’, he said. ‘It is a card not many people carry and means that we can borrow very cheap.’