SGX Yield Stock

Orderbook Hits New High

STE’s 4Q13 PATMI of SGD167.5m (+10.0% y-o-y), earned on the back of SGD1.94bn in revenue (+12.1% y-o-y), was slightly below expectation. Its orderbook reached a new high of SGD13.2bn, of which SGD4.3bn is expected to be delivered in FY14. Elsewhere, the outlook for all of its divisions, except land systems, is positive. Maintain BUY, with our DCF-based TP raised to SGD4.66 (WACC: 8.4%; growth: 0%).

Aerospace unit to perform. Singapore Technologies Engineering (STE)’s aerospace unit reported a PBT of SGD88.2m (+14.4% y-o-y) and revenue of SGD590.6m (+4.3% y-o-y) in 4Q14. The contracts announced in 4Q13 exceeded SGD780m, bringing the announced contract value to SGD2.3bn in total. Going forward, the group’s revenue is likely to be higher, with comparable profits, as its new operations in Guangzhou and Texas take time to ramp up while incurring more costs during their start-up periods. Its investment pact with Pensacola city in the US to develop a new airframe facility, as well as the initial portfolio of its aircraft leasing business, are expected to be finalised in FY14.

FY14 a better year for electronics, marine units. During the quarter, the electronics division reported a PBT of SGD46.7m (+27.8% y-o-y) and revenue of SGD529.8m (+18.7% y-o-y), while the marine unit booked a PBT of SGD47.1m (+28.4% y-o-y) and revenue of SGD377.9m (+48.6% yo-y). Going forward, both sectors are likely to report higher PBT and revenue in FY14, backed by a strong orderbook.

But downbeat on land systems. The land systems unit’s strong turnaround in 4Q13 – with 11.3% and 126.4% q-o-q jumps in revenue and PBT respectively – was due to a one-off gain from a property disposal. Still, its near-term outlook remains sluggish as macroeconomic conditions remain volatile and spending on capital equipment delayed.

Dividend payout ratio drops to 80%. While STE’s historical dividend payout ratio was c.90% of profit, FY13’s final dividend of SGD0.12 was only 80% due to a 30% withholding tax at its businesses overseas that restricts the flow of cash back to shareholders. Hence, the payout ratio will likely drop to 75% as the group aims to retain its overseas earnings to grow its businesses.

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.

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.