SGX Yield Stock

ST Engineering – FY09 Results

Previous Day Closing price: $3.19

Recommendation: HOLD (maintained)

Target price: $3.15 (maintained) 

ST Engineering’s FY09 results were in line with expectations, with net profit at S$443.9m. Earnings declined 6% y-o-y on flat revenue. STE performed well despite a challenging business environment, but has reduced its dividend payout from its usual 100% of earnings to 90%, for the sake of financial prudence. We are maintaining STE as a Hold as the stock looks fully priced. Our target price is S$3.15, or 19x FY10 earnings forecast. 

Sequential improvement trend maintained

STE’s 4Q09 continued its quarterly trend of steady earnings improvement off its low in 1Q09. The aerospace business was expectedly weak, where its US operations in particular have been impacted by the weak commercial MRO market. It continues to perform on its orderbook-based revenue, primarily conversions, which limited the division’s y-o-y earnings decline to just 16%. 

Other businesses taking up the slack

As for its other businesses, Electronics continues to be the star performer, having raised its revenue by 20% and PBT by 23%, with earnings coming from across all sub-groups. Land systems improved earnings despite lower turnover due to a better product mix, while Marine grew its turnover and earnings mainly from shipbuilding contracts. 

Dividend payout reduced for prudence, likely a one-off

STE reduced FY09 dividend payout to 90% of earnings from its usual 100%. STE will pay a final dividend of 10.28cts per share, and with the interim of 3.00cts per share, provides a yield of 4.2%. Management says it wants to maintain a more balanced debt to capital ratio, especially with the issue of its US$500m bond in July. As a policy, however, STE will still refrain from keeping too much cash in its books, and we expect the full payout ratio to be restored for FY10. 

Maintain HOLD, prospects fully priced in

Despite official guidance for flat earnings in FY10, management sounded relatively sanguine for a pick-up in business conditions in FY10, particularly in the Aerospace sector. We are taking a more optimistic stance and forecasting net profit growth of 12% to S$498.7m in FY10. Despite this, STE is already trading at 19.3x FY10 earnings, which is fair value versus the STI’s 15x. We maintain Hold with target price of S$3.15.

Look beyond the yield cut 

• 4Q09 earnings in line; excluding S$9m tax writeback, net profit was S$120.7m, almost flat q-o-q

• FY09 dividend payout cut to 90% from 100% earlier; final payout of 10.3Scts in May

• Savings add on to war chest in excess of S$1.7b; points to potential M&A activity

• Maintain BUY, TP reduced to S$3.60; any short term dips will present good entry points 

Mixed performance 4Q09 revenue up 9% q-o-q, contributed by Land Systems (+30%, higher Warthog and Terrex deliveries) and Electronics (+25%). However, major contributor Aerospace dragged down earnings with lower revenue and profits (PBT margin of 13% vs. 15% in 3Q09) but it was more of a timing issue and the PTF programme remains profitable. Going forward, we reduce our FY10-11 EPS estimates by about 2.5%, as we moderate our margin and sales mix assumptions across different sectors. To note, FY10 numbers will have lower benefit from Job Credits, which contributed about S$39m of savings in FY09. 

Orderbook, balance sheet to underpin growth. Order backlog at the end of FY09 stood at S$10.3b, excluding a US$500m Indefinite Delivery Indefinite Quantity contract signed with the US Army last year. Thus, we remain confident of about 8% EPS growth over the next 2 years, driven by higher revenue and margins. The kicker should come from acquisitions funded by the US$500m MTN issue. The Group currently boasts of S$315m net cash, up from S$172m at end-FY08, as better working capital management led to higher operating cash flows in FY09. 

Look beyond the negatives of dividend cut. While the cut in payout policy may have negative short-term impact, we think STE – with its defensive earnings base, and with the potential of organic as well as inorganic growth– should outperform the market in coming months, amidst the growing macro uncertainties. Thus, we maintain our BUY call on the stock, albeit at a reduced TP of S$3.60, as we change our valuation methodology to reflect the effect of modified dividend expectations.

Aerospace slack taken up by others

• Maintain Underperform; results within expectations. 4Q09 net profit of S$129.7m (+52% yoy) was within our expectations (S$132.3m) and consensus (S$124.4m). The star segments were Land Systems and Marine, offsetting Aerospace weakness. Although a better 2H09 kept full-year PATMI on a fairly even keel (-6% yoy), the recovery outlook is not certain. Management guides for comparable PBT for 2010. We cut our FY10-11 EPS by 5% on lower Aerospace assumptions and introduce FY12 earnings. As a result, our blended target price dips from S$3.09 to S$2.98. Another negative was the reduced dividend payout of 90%, from 100%. Full-year DPS of 13.3cts was below our expectation of 15cts and consensus (14.5cts). 

• Poor Aerospace performance, but positive guidance. 4Q09 Aerospace PBT (S$57.4m) floundered after a promising 3Q (S$70.2m). Management cited fewer passenger-to-freight (PTF) jobs in 2009, sporadic work cancellations and a lack of replacement MRO jobs in 4Q. Indicative MRO demand in early 2010 was positive, though, and ongoing PTF contracts are expected to sustain profitability. 

• Earnings growth for other divisions. Land Systems and Marine performed above our expectations in 4Q. Both, as well as Electronics, should book higher profitability in FY10. Land Systems should be supported by the delivery of large-sized contracts to Terrex and Warthog; both started in 2009. Marine should benefit from an Egyptian Navy contract realised in 2010, plus a variety of vessels due for delivery in the US. Higher-margin contracts (LTA Circle Line, military communication systems) should also contribute to Electronics. 

• Lower payout and above-mean valuations do not make us excited about the stock. Order book was flat at S$10.3bn. 2009 PBT (S$547m) was propped up by the Jobs Credit Scheme (S$39m), partially erased by higher stock obsolescence (-S$26m). 2010 earnings have to make do without such assistance and would have to depend on: 1) a sustainable Aerospace recovery; 2) major overseas contract wins for Land Systems; and/or 3) M&A growth. STE is trading at 20.1x CY10 P/E, above its 5-year average of 18x. We find it difficult to turn positive at this point.

ST Engineering enjoys 27% rise in Q4 profit

Revenue up 9%; proposes final dividend of 10.28 cents per share

ST Engineering posted a 27 per cent increase in its net profit for its fourth quarter ended Dec 31, 2009, from $102.3 million to $129.7 million, yesterday.

Revenue for the same period rose 9 per cent from $1.35 billion to $1.47 billion.

For FY2009, net profit dipped 6.3 per cent to $443.9 million even though revenue rose 3.8 per cent year-on-year to $5.5 billion.

A higher allowance for stock obsolescence in FY2009 – $48.7 million compared with $22.5 million in FY2008 – had been charged to the group’s profit from operations.

‘The group continued to secure contracts and replenish its book order which ended 2009 at $10.3 billion. Despite the ‘Great Recession’ in 2009, the group continued to invest in capacities and new capabilities across its global facilities, and added new customers,’ said Tan Pheng Hock, ST Engineering’s president and chief executive officer.

Out of that $10.3 billion, about $3.7 billion is expected to be delivered this year.

ST Engineering’s aerospace segment dipped 3 per cent in revenue to $1.87 billion year-on-year, because of lower turnover in its aircraft maintenance and modification and component/engine repair and overhaul business groups.

The group’s electronics sector grew the most in FY2009 compared to its other sectors, increasing 20 per cent from $1.1 billion to $1.37 billion in terms of turnover, boosted by milestone completions of the Circle Line project and sales of satellite communication products and electro-optics equipment.

Its land systems sector, however, shrank 8 per cent, from $1.3 billion to 1.2 billion over the same period, attributed mainly to lower sales from the automotive business group’s US operations.

Earnings per share stood at 14.74 cents per share for FY2009, down from 15.74 cents per share for FY2008.

A final dividend of 10.28 cents per share was proposed, compared with the 12.8 cents per share from the year before that.

Including the interim dividend of 3 cents per share, the total dividend for FY2009 will stand at 13.28 cents per share, compared with FY2008’s 15.8 cents per share.

The group expects to achieve a higher turnover and a comparable profit before tax figure for FY2010 compared with FY2009, barring unforeseen circumstances.

The group’s land systems and marine sectors look especially promising, with both their turnovers and profit before tax expected to be higher in FY2010.

‘If the economy picks up this year, we are well-poised to ride the market growth because of our well-established presence in several regions,’ said Mr Tan.