ST Engineering

Kim Eng on 18 Feb 2013

FY12 PATMI up 9.2%, 1Q13 to provide boost. ST Engineering (STE) reported FY2012 PATMI of SGD576m (+9.2% YoY), which was in-line with expectations, as growth was driven primarily by the Electronics (+10% YoY) and Aerospace segments (+9.3% YoY). Final and special dividends totaling SG13.8 cts/sh were declared, bringing full-year yields to ~4.2% p.a. We believe 1Q13 will be one to look forward to given the positive newsflow of a record orderbook once the recent MINDEF contract for 8 naval vessels is factored in. Upgrade to BUY, TP of SGD4.40 now based on a higher 21.5x FY2013 PER.

SGD12.1b orderbook belies true worth. We believe that the recent vessel design and build contract awarded by MINDEF could have a value in the region of SGD1.8b, and hence pave the way to yet another record orderbook of ~SGD13b to be announced in 1Q13. We had mentioned in our previous report that we were waiting for STE to once again show signs of outdoing itself in orderbook size before upgrading our valuation metrics, and this contract looks to fit our criteria.

Margins inching up. Another positive sign was the general trend of improvement in terms of profitability margins, which helped boost STE’s bottom-line in addition to the 6% YoY improvement in revenue.
Outlook positive. Management’s guidance for 2013 was largely positive, as the Aerospace, Electronics and Marine sectors were expected to record higher PBT YoY, while Land Systems was expected to maintain comparable profitability.

Going from strength to strength: Upgrade to BUY. Although STE’s share price has seen recent strength, we still see more up-side for a company we expect will provide further positive guidance in 1Q13 especially in terms of its orderbook. In light of firmer earnings visibility, we are raising our profit forecasts by 4-5% for FY2013-15 and upgrading STE to a BUY as we believe it now deserves a valuation pegged to 21.5x FY2013 PER (1 SD above historical mean).