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%.

Largest Marine Win Since Apr 2012

New Marine contracts worth SGD446m. ST Engineering (STE) announced new orders worth SGD446m secured by its marine division. Awarded in 4Q13, these contracts are for logistics management, maintenance, major upgrade and conversion projects, which would be carried out at its Singapore shipyards. These contracts are in addition to the USD350m (c.SGD420m) shipbuilding contract awarded to its US shipyard, VT Halter Marine in Nov 2013. In our view, this is a significant contract win for the marine division as its value is close to its annual sales in Asia (2012: SGD492m). Furthermore, it is the largest marine contract announced since April 2012, when the SGD880m shipbuilding order for the Royal Oman Navy was awarded.

Brings total order win to SGD3.0b in 2013; await better entry point. While providing better visibility for its marine division, the latest contracts are not material to the group’s overall earnings. With the latest win, an estimated SG3.0b worth of contracts was awarded to the STE group in 2013. The stock remains unattractive at 20x FY14E P/E (marginally above its historical average of 19x). Maintain Hold.

Meeting Expectations

ST Engineering (STE)’s 2Q13 PATMI edged up 3.3% y-o-y to SGD148m, within our expectations. Its orderbook of SGD12.7bn supports our 6.7% earnings growth forecast for FY13. We continue to like STE for its solid fundamentals, with a 31% ROE and a 4.2% yield. Maintain BUY, with a DCF-derived TP of SGD4.70. The company will distribute an interim dividend of three cents a share on 13 Sept 2013.

2Q13 results within expectations. STE’s 2Q13 results were in line, with 2Q13 and 1H13 PATMI accounting for 24% and 46% of our and consensus’ FY13 estimates respectively. Given that 1H has historically been weaker than 2H, Management expects higher revenue and PBT in 2H13 compared to 1H13.

Broad-based growth. 2Q13 PATMI grew 3.3% y-o-y and 10.3% q-o-q to SGD148, while PBT margins remained stable, declining by a marginal 0.1ppt y-o-y to 11.9%. STE recorded growth across all its business segments on a PBT level. Its key aerospace segment’s PBT growth was muted (+0.9% y-o-y), partly due to a SGD7m disposal of property gain in 2Q12.

Orderbook remains robust. STE reported an orderbook of SGD12.7bn as of end 2Q13 (vs SGD13.0bn in end-March 2013), supported by SGD430m of new contract wins by its aerospace arm, which include an exclusive component maintenance-by-the-hour (MBH) contract with Spring Airlines Japan, as well as a 5-year multi-crew pilot licence (MPL) training contract with Qatar Airways. Its electronics division secured SGD207m of new contracts including three rail contracts from the Land Transport Authority (LTA) as well as Satcoms solutions & communications systems projects. The company expects to deliver SGD2.8bn of the orderbook in 2H13.

Maintain BUY on strong profit matrix. STE displays solid fundamentals with its: i) 31% ROE, ii) 10-year EPS CAGR of 5%, iii) net cash, and iv) 4.2% yield. The stock currently trades at a 21.5x FY13 P/E, 12% below its historical 24.5x peak.

Meeting Expectations

ST Engineering (STE)’s 2Q13 PATMI edged up 3.3% y-o-y to SGD148m, within our expectations. Its orderbook of SGD12.7bn supports our 6.7% earnings growth forecast for FY13. We continue to like STE for its solid fundamentals, with a 31% ROE and a 4.2% yield. Maintain BUY, with a DCF-derived TP of SGD4.70. The company will distribute an interim dividend of three cents a share on 13 Sept 2013.

2Q13 results within expectations. STE’s 2Q13 results were in line, with 2Q13 and 1H13 PATMI accounting for 24% and 46% of our and consensus’ FY13 estimates respectively. Given that 1H has historically been weaker than 2H, Management expects higher revenue and PBT in 2H13 compared to 1H13.

Broad-based growth. 2Q13 PATMI grew 3.3% y-o-y and 10.3% q-o-q to SGD148, while PBT margins remained stable, declining by a marginal 0.1ppt y-o-y to 11.9%. STE recorded growth across all its business segments on a PBT level. Its key aerospace segment’s PBT growth was muted (+0.9% y-o-y), partly due to a SGD7m disposal of property gain in 2Q12.

Orderbook remains robust. STE reported an orderbook of SGD12.7bn as of end 2Q13 (vs SGD13.0bn in end-March 2013), supported by SGD430m of new contract wins by its aerospace arm, which include an exclusive component maintenance-by-the-hour (MBH) contract with Spring Airlines Japan, as well as a 5-year multi-crew pilot licence (MPL) training contract with Qatar Airways. Its electronics division secured SGD207m of new contracts including three rail contracts from the Land Transport Authority (LTA) as well as Satcoms solutions & communications systems projects. The company expects to deliver SGD2.8bn of the orderbook in 2H13.

Maintain BUY on strong profit matrix. STE displays solid fundamentals with its: i) 31% ROE, ii) 10-year EPS CAGR of 5%, iii) net cash, and iv) 4.2% yield. The stock currently trades at a 21.5x FY13 P/E, 12% below its historical 24.5x peak.

Robust Outlook To Support Lofty Valuations

• Despite premium valuations, ST Engineering (STE)’s defence and commercial-driven record order book of SGD13b, along with a potential catalyst in the form of a major billion-dollar contract, continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.
  
• STE is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008.
  
• ST Aerospace’s recent acquisition of a 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330-200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.