ST Engineering - CIMB Research 2016-12-05: Sweet spot structurally

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SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Sweet spot structurally

• Key investment themes are earnings turnaround from land systems and marine.
• STE is in a sweet spot of multiple global structural tailwinds: rising interest rates, expectations of better US economy, urbanisation trend in Asia and higher oil price.
• Its net cash should sustain a S$0.15 DPS. STE is trading below its historical mean of 20x forward P/E.

US economy beneficiary

• With 25% of its revenue derived in the US, increased spending within the US and a better economic outlook could benefit marine, land systems (road construction vehicles and beverages trucks) and aerospace (stronger US airlines’ profit improves willingness to incur aircraft maintenance expenses).

Electronics in a favourable environment

• The division benefits from multiple positive structural trends including urbanisation, smart cities development, and increasing demand for data connectivity and security (physical surveillance, cyber and cloud).
• This could sustain a quarterly order momentum of S$500m and annual PBT growth of 10%.

The worst could be over for marine on higher oil prices

• After two years of order droughts, the higher oil prices could see a return of some shipbuilding orders while supporting the high-margin ship repair business.
• Defence contracts is a wild card. Marine is currently building eight litoral mission vessels for the Singapore Navy.

Land systems finally defensive 

• With the woes of China losses and inventory provisions over on the commercial side, land systems’ profit will be defensive going forward, comprising munition and weapon (40% of land systems’ PBT) as well as recurring maintenance/trading income from the MAN buses and fleet of taxis (CityCab and Uber).

Net cash of S$262m, maintain Add

• Our target price (S$3.75) is unchanged and based on blended valuations (P/E, DCF and dividend yield). STE’s net cash (including investments in bonds) stood at S$262m.
• Stronger-than-expected orders and divestment of loss-making non-core business could be the key catalysts. 
• Key risks include a general slowdown in Asian economies.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-12-05

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