FY12 In-Line; Looking Forward to 1Q13

FY12 PATMI up 9.2%, 1Q13 to provide boost. ST Engineering (STE) reported FY2012 PATMI of SGD576m (+9.2% YoY), which was in-line with expectations, as growth was driven primarily by the Electronics (+10% YoY) and Aerospace segments (+9.3% YoY). Final and special dividends totaling SG13.8 cts/sh were declared, bringing full-year yields to ~4.2% p.a. We believe 1Q13 will be one to look forward to given the positive newsflow of a record orderbook once the recent MINDEF contract for 8 naval vessels is factored in. Upgrade to BUY, TP of SGD4.40 now based on a higher 21.5x FY2013 PER.

SGD12.1b orderbook belies true worth. We believe that the recent vessel design and build contract awarded by MINDEF could have a value in the region of SGD1.8b, and hence pave the way to yet another record orderbook of ~SGD13b to be announced in 1Q13. We had mentioned in our previous report that we were waiting for STE to once again show signs of outdoing itself in orderbook size before upgrading our valuation metrics, and this contract looks to fit our criteria.

Margins inching up. Another positive sign was the general trend of improvement in terms of profitability margins, which helped boost STE’s bottom-line in addition to the 6% YoY improvement in revenue.

Outlook positive. Management’s guidance for 2013 was largely positive, as the Aerospace, Electronics and Marine sectors were expected to record higher PBT YoY, while Land Systems was expected to maintain comparable profitability.

Going from strength to strength: Upgrade to BUY. Although STE’s share price has seen recent strength, we still see more up-side for a company we expect will provide further positive guidance in 1Q13 especially in terms of its orderbook. In light of firmer earnings visibility, we are raising our profit forecasts by 4-5% for FY2013-15 and upgrading STE to a BUY as we believe it now deserves a valuation pegged to 21.5x FY2013 PER (1 SD above historical mean).

RESILIENT EARNINGS THROUGH DIVERSIFIED BUSINESSES

• Solid 9M12 results, as expected
  
• Increasing earnings visibility
  
• Downgrade to HOLD on price outperformance
  

Good price performance for 2012 YTD

STE has been having a good run, and YTD its share price has climbed 44%, outpacing the STI Index, which climbed only 19%. In the uncertain economic environment, investors have been seeking defensive businesses with good dividend yields and STE’s share price has benefited. The growth in air passenger traffic has supported the earnings of MRO providers. For 9MCY12, the aerospace division registered 9.3% YoY growth in pre-tax profit to S$226.7m. Apart from its aerospace segment, which contributes the most to its top-line and bottom-line, the other business lines are fairly defensive in nature, due to government-related projects. Commercial sales formed 65% of total sales in 3Q12 (versus 62% in 3Q11).

Overall solid results, as expected

To recap, 9M12 results were in line with our expectations, with earnings per share of 13.79 S cents (on a fully diluted basis) forming 76% of our FY12F estimate of 18.2 S cents. As of end-Sep, STE’s order book stood at S$12.5b, of which about S$1.4b is expected to be delivered in 4Q12. STE expects to achieve higher revenue and PBT for FY12, compared to FY11.

Order book has been growing over the LT

As we noted in our 28 Sep report, STE’s order book (as at the end of each year) has on average grown faster than the following year’s annual revenue. The order book grew 16% p.a. between end-2005 and end-2010, from S$5.38b to S$11.5b, while annual revenues grew 6% p.a. between FY06 and FY11. This trend suggests that the average tenure of order book contracts has been increasing. The fact that the order book has been growing faster than revenue implies increasing earnings visibility into the future.

Downgrade to HOLD

We maintain our fair value of S$3.90 on STE but downgrade it to a HOLD, since the share price has run up a fair bit already. We would be buyers at S$3.66.

On track to strong growth year

• 3Q12 net profit of S$146m (+9% y-o-y) ahead of our estimates; margin improvements across all segments
  
• Revised up FY12/13F earnings by 3-4%
  
• YTD order wins of S$3.5bn already past FY11 levels; underpins FY13/14 earnings visibility
  
• Maintain BUY with higher TP of S$3.80
  

Highlights

Delivering strong results again. 3Q12 net profit of S$146m (up 9% y-o-y and 2% q-o-q) came in above our estimates of about S$140m, driven by strong margins across all business segments. Revenue was up 11% y-o-y to S$1.54bn, driven by the Aerospace, Electronics and Land Systems sectors. 9M12 net profit of S$424m accounts for more than 75% of our existing full-year estimates for FY12.

Margin improvement across all sectors. Group PBT margin improved to 12% in 3Q12 from 11.5% in 1Q12. Aerospace core PBT margin remained steady at 15% (17% including write-back of provisions), while Electronics and Marine PBT margins of 12% and 13% came in at the higher end of the historical range. Adjusting for S$14m of provisions, Land Systems PBT margin was also strong at 8.7%.

Our View

Strong order wins momentum. STE closed the quarter with a S$12.5bn orderbook. YTD, STE has announced close to S$3.5bn worth of new contracts, which is already ahead of the S$3.2bn worth of contracts announced in FY11. In 3Q12, the Aerospace division led with S$690m worth of new orders, continuing the momentum from previous quarters. In what could potentially be a medium to long term positive development, STE, along with consortium partner SAIC, has recently been chosen by United States Marine Corps as 1 of 4 contenders for the ~US$3bn Marine Personnel Carrier programme. This potentially places STE’s defence capabilities at par with more established players, and could lead to more international recognition in future.

Recommendation

Maintain BUY. With this quarter in the bag, STE’s growth trajectory seems to be firmly on track, driven by healthy orderwin momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates by about 2.6%/ 3.9% to account for the above. We now expect robust 9% earnings growth in FY12, and 6% growth in FY13/14. Given visible earnings growth, strong balance sheet and healthy dividend yield of 5%, we maintain our BUY call. Our TP, which is based on the blended valuation methodology, is revised up to S$3.80 as we roll over to FY13 numbers.

On track to strong growth year

• 3Q12 net profit of S$146m (+9% y-o-y) ahead of our estimates; margin improvements across all segments
  
• Revised up FY12/13F earnings by 3-4%
  
• YTD order wins of S$3.5bn already past FY11 levels; underpins FY13/14 earnings visibility
  
• Maintain BUY with higher TP of S$3.80
  

Highlights

Delivering strong results again. 3Q12 net profit of S$146m (up 9% y-o-y and 2% q-o-q) came in above our estimates of about S$140m, driven by strong margins across all business segments. Revenue was up 11% y-o-y to S$1.54bn, driven by the Aerospace, Electronics and Land Systems sectors. 9M12 net profit of S$424m accounts for more than 75% of our existing full-year estimates for FY12.

Margin improvement across all sectors. Group PBT margin improved to 12% in 3Q12 from 11.5% in 1Q12. Aerospace core PBT margin remained steady at 15% (17% including write-back of provisions), while Electronics and Marine PBT margins of 12% and 13% came in at the higher end of the historical range. Adjusting for S$14m of provisions, Land Systems PBT margin was also strong at 8.7%.

Our View

Strong order wins momentum. STE closed the quarter with a S$12.5bn orderbook. YTD, STE has announced close to S$3.5bn worth of new contracts, which is already ahead of the S$3.2bn worth of contracts announced in FY11. In 3Q12, the Aerospace division led with S$690m worth of new orders, continuing the momentum from previous quarters. In what could potentially be a medium to long term positive development, STE, along with consortium partner SAIC, has recently been chosen by United States Marine Corps as 1 of 4 contenders for the ~US$3bn Marine Personnel Carrier programme. This potentially places STE’s defence capabilities at par with more established players, and could lead to more international recognition in future.

Recommendation

Maintain BUY. With this quarter in the bag, STE’s growth trajectory seems to be firmly on track, driven by healthy orderwin momentum and improvement in margins. We revise upwards our FY12/13F earnings estimates by about 2.6%/ 3.9% to account for the above. We now expect robust 9% earnings growth in FY12, and 6% growth in FY13/14. Given visible earnings growth, strong balance sheet and healthy dividend yield of 5%, we maintain our BUY call. Our TP, which is based on the blended valuation methodology, is revised up to S$3.80 as we roll over to FY13 numbers.

Holding On after a Stellar Ride

3QFY12 results in-line, HOLD on price run-up. ST Engineering (STE) reported 9MFY12 PATMI of SGD424m, coming in at 73% of our full-year forecasts. 3QFY13 PATMI of SGD146m was a 9.5% improvement YoY, contributed by double-digit profitability growth in the Electronics (+SGD3.8m, +11%) and Land Systems (+SGD4.6m, +30%) segments. We leave our estimates largely intact, downgrading the stock to a HOLD as we believe STE is fairly valued at current price levels. Target Price remains at SGD3.78.

Orderbook still healthy, but no record this 3Q. STE’s orderbook stood at SGD12.5b this 3Q, just shy of the record SGD12.7b level announced in 2QFY12. SGD1.04b of new contracts were announced this quarter, with ST Aerospace’s MRO contracts carrying the bulk at SGD692m. The remaining contracts were previously announced: SGD166m from ST Electronics (Rail electronics, Sat-comms, sensor solutions) and SGD179m from ST Marine (Shipbuilding and Ship repair, including two OSVs).

Marine profit declines, Aerospace shows muted growth. STE’s overall 3QFY12 PBT growth of 11% was held back by a declining PBT from ST Marine (-2.8% YoY) and muted growth from ST Aerospace (+3.2% YoY). ST Marine’s lower overall PBT was caused by poorer Shipbuilding (-17.3% YoY) and Ship repair (-31.7% YoY) results. ST Aerospace had a significantly poorer PBT from its Maintenance & Modification segment (-18.3%).

Fairly valued – downgrade to HOLD. While results were in line with our expectations, the recent share price run-up has led to our downgrade of STE to a HOLD recommendation. Our valuation remains pegged to STE’s historical mean 19x FY2013 PER. STE’s strong balance sheet and cash-flows should still support dividend yields of ~5%, which existing investors can continue to enjoy. For now, we keep a look-out for catalysts which include bumper contracts that push its orderbook past record levels once again.