Tuesday 11 November 2014

ST Engineering

Kim Eng on 7 Nov 2014

  • 3Q14 net income in line. Aerospace’s net profit down 27% YoY.
  • MRO slack could remain. STE the largest third-party MRO provider in the world.
  • Maintain HOLD & SGD3.50 TP (19x FY15E P/E).
Lower profitability, lower guidance
3Q14 net income of SGD121.3m, down 7.7% YoY, was in line. Aerospace sales declined 8% YoY to SGD470m on a weaker CERO business. This drove the key division’s net profit down 27% YoY. Marine remained affected by weaker shipbuilding execution in the US. Order book of SGD13.2b was marginally below Jun 2014’s SGD13.4b. STE now expects lower YoY PBT in FY14, despite comparable sales. It earlier guided for comparable PBT. 9M14 net income forms 70% of our FY14E forecast and 68% of the market’s.

DPS to fall
Aerospace’s softness reflects the broad-based slowdown in the aviation industry. Workload for MRO players could continue to slacken, as: 1) improved aircraft and engine reliability implies longer maintenance intervals; and 2) airlines continue to scale back their capacity to combat a regional surplus.

Dividend payouts may dip as the company retains cash abroad, mainly in the US, for expansion and to avoid paying withholding tax if the cash is repatriated to Singapore. Our DPS target of 13.5 SGD cts for a 75% payout translates into 3.7% yields.
Valuations appear fair at 20x FY15E P/E, marginally above its 10-year average of 18.7x. Maintain HOLD, EPS and SGD3.50 TP, based on 19x FY15E P/E, its 10-year average.

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