ST Engineering

Kim Eng on 10 May 2012

Strong profit growth. ST Engineering (STE) reported a strong set of 1Q2012 results, with Net Profit of SGD 134.4 mil reflecting an increase of 21% YoY. These results were broadly within our FY2012 expectations - we will be maintaining our forecasts and BUY recommendation based on STE’s historical P/E mean of 19x. STE’s growing orderbook, contributed by all four business segments this quarter will continue to provide earnings visibility and resilience amidst the backdrop of global economic uncertainty.

Boosted by healthier margins across the board. Although 1Q2012 revenue came in almost flat YoY, healthier net margins of 8.7% versus 1Q2011 margins of 7.1% boosted profits. Encouragingly, all four business segments posted improved margins, led by ST Marine which benefited from a favourable sales mix.

Strong cashflow. Another highlight of STE’s 1Q2012 financial performance was its strong operating cashflow at SGD 547 mil, which contributed to an improvement of its net cash position to SGD 565 mil from SGD 2.2 mil, and providing support for our forecasted FY2012 DPS of SGD 0.17 (increase of 10% vs FY2011).
Outlook positive. Management forecasts a positive outlook for three of its four business segments. Its Aerospace, Electronics and Marine sectors are expected to record higher PBTs in 1H2012 vs 1H2011. Only its Land Systems segment is expected to show comparable profit.

Solid business fundamentals - Maintain Buy. STE has a solid business model underpinned by defence contracts (40% of 1Q2012 revenue), with earnings visibility continually provided by its growing orderbook. Its business segments continue to show positive macro trends to support growth and provide a basis for earnings resilience. We reiterate our BUY recommendation for STE pegged at 19x FY12 PER, based on its 10-year historical PER mean.