ST Engineering

Kim Eng on 28 Feb 2014

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.