FY13 results in line

• FY13 EPS flat YoY
  
• 80% dividend payout vs. 90%
  
• Maintain HOLD
  

Land Systems’ gain on property disposal

STE reported a set of FY13 results that were generally in line with ours and the street’s expectations. FY13 EPS of 18.73 S cents (flat versus FY12’s 18.76 S cents) formed 99% and 104% of the street’s and our forecasts. 4Q13 revenue grew 12% YoY and 25% QoQ to S$1.94b. Recall that 3Q13 was a disappointing quarter partially due to lower gross profit from Aerospace and Land Systems and an impairment of S$23.7m for ROPAX. On a QoQ basis, all four sectors registered higher revenue and PBT in 4Q13: Aerospace (+15%/+12%), Electronics (+49%/+9%), Land Systems

(+12%/+126%) and Marine (+27%/39%). Revenue growth was driven primarily by Electronics, which saw milestones completions of an air traffic control system, LTA’s communications systems projects, higher sales of satellite communication products and electro-optics equipment. Land System’s PBT jump to S$39.6m was chiefly due to gain on disposal of a property, higher revenue and lower operating expenses.

2013 round-up

FY13 revenue was S$6.63b, up 4%. PBT and net profit were S$730m (+2%) and S$581m (+1%). Commercial sales accounted for 62% of revenue. As of end-2013, order book was S$13.2b, up 9% YoY. Final ordinary and special dividends of 4.0 S cents and 8.0 S cents bring FY dividends to 15.0 S cents, versus 16.8 S cents for FY12. Payout ratio is 80%, versus ~90% for FY09-FY12.

Guidance for 2014

Management expects revenue and PBT in FY14 to be higher. For Aerospace, revenue is expected to be higher, but PBT is expected to be comparable. For Electronics and Marine, FY14 revenue and PBT are expected to be higher. For Land Systems, FY2014 revenue is expected to be comparable, whilst PBT is expected to be lower. But STE notes that dividend payout ratio may track lower to 75% over the next 3-5 years as its overseas operations grow further.

Maintain HOLD

We lower our FY14F EPS estimate slightly to 20.2 S cents from 20.6 S cents and trim our FV to S$3.84 (19x P/E peg) from S$3.91. Maintain HOLD.

Dividend upside to be capped

• Net income of SGD580.8m in line with expectations and guidance. DPS cut to SGD 15.0 cts (80% payout).
  
• Upside in sales for aircraft engine work delayed.
  
• Payout ratio cut to 75% for FY14E-16E with stock yielding 4% at current price. Maintain HOLD and TP of SGD4.00.
  

Earnings in line with expectations

STE reported net income of SGD580.8m (+0.8% YoY) for FY13, in line with our expectations and management’s guidance for comparable profits for the year. Sales grew by 4%, with the marine division seeing the largest expansion (+23% YoY). Strong contract wins in 4Q13 took the orderbook to a record high of SGD13.2b (Dec 2012: SGD12.1b, Sep 2013: SGD12.5b). However, DPS was lowered to SGD 15.0 cts (FY12: SGD 16.8 cts) following a cut in payout ratio to 80% from 90% last year. Management expects revenue and PBT for FY14 to exceed FY13’s achievement.

Disappointing DPS

Although STE’s earnings were within our expectations, the lower DPS of SGD 15.0 cts was a disappointment. Management said that as the group’s share of earnings from overseas increase, there will be a cap on its ability to pay out higher dividends, given the need to pay withholding tax on overseas income (it guided for a payout ratio of 75% over the next 3-5 years). It added that overseas earnings will be retained to fund expansion. Our expectations for higher sales for aircraft engine work failed to materialise due to improved reliability of the CFM56 engines. Management expects upside in engine sales to be delayed to 2016/2017. For its marine business in Singapore, it sees heightened competition from local players for ship repair. We keep our FY14E-16E forecasts largely unchanged but lower our payout ratio to 75%. Consequently, we expect the stock to yield approximately 4% over the next three years. Our TP of SGD4.00 is based on 20x FY14E P/E. Maintain HOLD.

Dividend upside to be capped

• Net income of SGD580.8m in line with expectations and guidance. DPS cut to SGD 15.0 cts (80% payout).
  
• Upside in sales for aircraft engine work delayed.
  
• Payout ratio cut to 75% for FY14E-16E with stock yielding 4% at current price. Maintain HOLD and TP of SGD4.00.
  

Earnings in line with expectations

STE reported net income of SGD580.8m (+0.8% YoY) for FY13, in line with our expectations and management’s guidance for comparable profits for the year. Sales grew by 4%, with the marine division seeing the largest expansion (+23% YoY). Strong contract wins in 4Q13 took the orderbook to a record high of SGD13.2b (Dec 2012: SGD12.1b, Sep 2013: SGD12.5b). However, DPS was lowered to SGD 15.0 cts (FY12: SGD 16.8 cts) following a cut in payout ratio to 80% from 90% last year. Management expects revenue and PBT for FY14 to exceed FY13’s achievement.

Disappointing DPS

Although STE’s earnings were within our expectations, the lower DPS of SGD 15.0 cts was a disappointment. Management said that as the group’s share of earnings from overseas increase, there will be a cap on its ability to pay out higher dividends, given the need to pay withholding tax on overseas income (it guided for a payout ratio of 75% over the next 3-5 years). It added that overseas earnings will be retained to fund expansion. Our expectations for higher sales for aircraft engine work failed to materialise due to improved reliability of the CFM56 engines. Management expects upside in engine sales to be delayed to 2016/2017. For its marine business in Singapore, it sees heightened competition from local players for ship repair. We keep our FY14E-16E forecasts largely unchanged but lower our payout ratio to 75%. Consequently, we expect the stock to yield approximately 4% over the next three years. Our TP of SGD4.00 is based on 20x FY14E P/E. Maintain HOLD.

Marine Business To Provide Stability

Following a series of positive announcements from the company, we reaffirm our confidence in STE continuing to deliver. Apart from the healthy project backlog of SGD12.5bn as of 3Q13, the company has also generated more stable income by expanding its maintenance services segment as well as investing in the aircraft leasing and ferry service businesses. Maintain BUY, with a DCF-based TP of SGD4.56.

Orderbook to last till end-2015. ST Marine announced that it has secured new orders worth about SGD446m in 4Q13. This is on top of the USD350m worth of contracts to build two units of container roll-on/roll-off (Ropax) vessels which it secured earlier. These contracts largely involve logistics management, maintenance, major upgrade and conversion works for the offshore industries, contracted to be carried out at the Singapore Tuas yard. Of more significance is that the company’s environmental business based in China was awarded a contract to design a niche Pneumatic Waste Collection System for high-rise commercial and residential projects in Guangzhou. As such, we believe that STE’s marine business focused on customised and high engineering content work is supported by a robust orderbook that will last till end-2015.

More recurring income stream. ST Marine also announced a week ago that it will invest in a 10% stake in a newly established cruise ferry service business, Nova Star Cruises Limited, which operates between Yarmouth in the US and Portland in Canada, with Quest Navigation holding the remaining 90% stake. The investment is aimed at providing a more stable income stream as well as downstream support to the group’s shipbuilding business, as it will bareboat charter ST Marine’s Ropax vessel for the next three years, with an option to extend up to seven years. Elsewhere, ST Marine also recently equipped its 140-hectare Mississippi yard with new ship repair capability, thus opening up a geographically-diversified stream of stable maintenance revenue.

Reducing peg to 19x FY14F EPS

• Price correction after 3Q13 results
  
• A solid engineering conglomerate
  
• Maintain HOLD
  

3Q13 lead to market’s re-examination

Singapore Technologies Engineering (STE) had a good run from 31 Dec 2012 to 7 Nov 2013. Its share price rose 9.9%, outstripping the STI’s 1.1% increase over the same period. However, STE’s 3Q13 results announced on 7 Nov 2013 missed ours and the street’s expectations. 9M13 EPS of 13.34 S cents formed only 66% and 68% of the street’s and our prior FY13 forecast. While 3Q13 revenue grew 0.5% YoY to S$1.55b, PATMI fell 9.9% to S$131.4m. Since then, STE’s share price has fallen 7.6% from S$4.20 to S$3.88 (versus a 2.4% decline for the STI). While the miss was in large part due to one-off items, we believe that investors have begun to apply lower valuations to STE to bring its multiples closer in line with its peers after the outperformance and with gradually less interest in yield plays such as STE due to the progressive tapering by the US Fed.

Still hauling in the contracts

STE reported yesterday that ST Marine has secured new orders worth about S$446m in 4Q13. These orders are in addition to the recent contract worth about US$350m won by its US shipyard, VT Halter Marine, Inc for the design and construction of two units of Container Roll-on/Roll-off vessels and the bareboat charter contract for a Roll-on/Roll-off Passenger vessel.

Lower FY14F P/E peg

Based on our estimates, FY14 could show a 14% YoY increase in EPS to 20.6 S cents. Re-examining STE’s peer group’s multiples, we note that its regional peers are trading at a Bloomberg forward P/E of 17.2x. STE is a well-run, diversified conglomerate with defensive characteristics due to its fairly stable government-related work (e.g. 37% of 3Q13 revenue) and it deserves to trade at least on par with, if not at a premium to, its peer group. We lower our peg from 21x to 19x (applied to FY14F EPS of 20.6 S cents), which reduces our FV on STE from S$4.32 to S$3.91, and maintain a HOLD rating on STE on valuation grounds. FY14F dividend yield is 4.7%.

Lower FY14F P/E peg

Based on our estimates, FY14 could show a 14% YoY increase in EPS to 20.6 S cents. Re-examining STE’s peer group’s multiples, we note that its regional peers are trading at a Bloomberg blended forward P/E of 17.2x. STE is a well-run, diversified conglomerate with defensive characteristics due to its fairly stable government-related work (e.g. 37% of 3Q13 revenue) and it deserves to trade at least on par with, if not at a premium to, its peer group. We lower our peg from 21x to 19x (applied to FY14F EPS of 20.6 S cents), which reduces our FV on STE from S$4.32 to S$3.91, and maintain a HOLD rating on STE on valuation grounds. FY14F dividend yield is 4.7%.