ST Engineering

OCBC Investment Research, Aug 14

ST Engineering (STE) reported Q2 2013 results that were generally in line with our expectations and the street's. Revenue grew 1.7 per cent y-o-y to S$1.60 billion, and profit after tax and minority interests climbed 3.3 per cent to S$147.9 million. Profit before tax (PBT) margin for the group stayed flat y-o-y at 12 per cent.

Highlights include:

• Absence of gain on disposal of properties in Aerospace and Land Systems, which totalled S$12.8 million in Q2 2012.
• Write-back of allowance for doubtful debts (S$2.7 million) in Q2 2013 versus allowance for doubtful debts (S$10.6 million) in Q2 2012.
• Unfavourable fair value change of S$3.9 million in Q2 2013 versus a favourable fair value change of S$6.7 million in Q2 2012 with regard to cross currency interest rate swaps (CCIRS) from USD to SGD. STE's order book fell slightly from its high of S$13.0 billion as of end-March 2013 to S$12.7 billion, of which S$2.8 billion is expected to be delivered in H2 2013.

All four sectors registered higher revenue y-o-y in Q2 2013: Aerospace (+3 per cent), Electronics (+2 per cent), Land Systems (+1 per cent) and Marine (+12 per cent). However, it should be noted that there was lower revenue in Q2 2013 than what STE's management had anticipated due to the rescheduling of Electronics project milestone completions to later periods.

PBT for all four sectors rose y-o-y: Aerospace (+1 per cent), Electronics (+13 per cent, there was a gain on disposal of a 4.9 per cent holding in Hong Kong-listed company), Land Systems (+7 per cent) and Marine (+13 per cent). The "Others" component clocked a loss before tax of S$10.1 million versus a Q2 2012 PBT of S$0.8 million chiefly due to the CCIRS. STE continues to anticipate achieving higher revenue and PBT in FY13 versus FY12. The company also expects to achieve higher revenue and PBT in H2 2013 versus H1 2013. In particular, all sectors' H2 2013 revenue and PBT are expected to be higher half-on-half.

We tweak our assumptions and our FY13 forecast EPS falls slightly to 19.6 Singapore cents from 19.8 Singapore cents. Using a higher 21 times peg (versus 20 times previously) against our FY13 forecast EPS, our fair value climbs to S$4.11 from S$3.97. We maintain a "hold" rating on STE. FY13 forecast dividend yield is 4.1 per cent.

HOLD