ST Engineering

OCBC on 7 Mar 2012


According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including ST Engineering’s (STE) subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. STE put out an announcement in response to the bribery scandal. In the announcement, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. According to STE, STK has never won any defence contract or exported defence sales to India. STE also has not included any expected sales to India’s MoD in its FY12 guidance and expects this blacklisting to have no financial impact on the group’s financial performance. Thus, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

India’s bribery scandal
ST Engineering (STE) yesterday morning halted trading of its shares and also put out an announcement in response to a bribery scandal in India. According to an Aviation Week story dated 5 Mar 2012, the Indian Ministry of Defence (MoD) has blacklisted six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. The MoD’s decision was based on evidence related to illegal gratification to officials, including Sudipto Ghosh, the former Director General of India’s Ordnance Factory Board (OFB).

STE maintains innocence
In its announcement yesterday, STE maintains it is a law-abiding group and will now seek legal advice so as to clear its name of any shenanigan. Furthermore, despite media reports of the blacklisting, STK has not received any official notification from the Indian authorities on this matter. In fact, in all the previous court hearings and affidavits filed, the MoD repeatedly said STK was only temporarily suspended, but not blacklisted, as an arms vendor to India. The court hearings were the result of three petitions STE filed with the Delhi High Court in Mar 2011 to seek clarification on the alleged blacklisting.

No financial impact
According to STE, STK has never won any defence contract or exported defence sales to India. STE also understands that developing defence sales to India will be a long process and has not included any expected sales to India’s MoD in its FY12 guidance. Thus, the group expects this blacklisting to have no financial impact on the group’s financial performance and maintains its FY12 guidance.

Maintain BUY
Since this matter has no financial impact on STE, coupled with STE’s vigorous insistence of its innocence, we maintain our BUY rating and fair value estimate of S$3.32/share on STE.

ST Engineering

OCBC on 24 Feb 2012


ST Engineering (STE) 4Q11 revenue fell 5% YoY to S$1.5b but PATMI edged 2% higher to S$152m. The 4Q11 PATMI gain was primarily driven by two factors – 1) a total of S$10m of one-off losses in 4Q10 and 2) a lower tax rate of 16% in 4Q11. For the full year, STE’s FY11 revenue remained flat at a tad shy of S$6b while PATMI grew 7% to S$528m, missing consensus revenue and PATMI estimates by 8% and 4% respectively. STE disclosed a robust order book of S$12.3b at end-FY11 and announced a total dividend payout of 12.5 cents/share, made up by a final dividend of 4 cents/share and a special dividend of 8.5 cents/share. We increased our fair value estimate of STE to S$3.32/share, from S$3.01/share previously, and maintain our BUY rating.

Lower revenue but higher PATMI
ST Engineering (STE) 4Q11 revenue fell 5% YoY to S$1.5b but PATMI edged 2% higher to S$152m. The 4Q11 PATMI gain was primarily driven by two factors – 1) a total of S$10m of one-off losses in 4Q10 and 2) a lower tax rate of 16% in 4Q11, compared to the 23% tax rate in 4Q10. For the full year, STE’s FY11 revenue remained flat at a tad shy of S$6b while PATMI grew 7% to S$528m, missing consensus revenue and PATMI estimates by 8% and 4% respectively. On a more positive note, STE disclosed a robust order book of S$12.3b at end-FY11 and announced a total dividend payout of 12.5 cents/share, which represents a 90% dividend payout ratio for FY11. The dividend payout is made up of a final dividend of 4 cents/share and a special dividend of 8.5 cents/share.

Segmental contribution
In terms of revenue contribution from the different segments in 4Q11, Aerospace grew a strong 14% YoY to S$503m, Electronics gained 8% to S$408m, Land Systems remained flat at $465m, while Marine plunged 68% to S$91m. Management clarified that STE’s Marine segment was hit by a one-time S$176m reversal of revenue, which was the result of the termination of a shipbuilding contract for a Ropax ferry with Louis Dreyfus Armateurs announced during 4Q11. Land Systems was the star segment in pre-tax profit growth recording a 27% YoY jump to S$37m, while Marine edged 1% higher to S$38m. However, Aerospace pre-tax profit fell sharply by 19% to S$71m and Electronics eased 2% to S$33m.

Maintain BUY with higher S$3.32 fair value
At last night’s results briefing, management guided for both revenue and pre-tax profit growth in FY12, barring unforeseen circumstances. Compared to our previous fair value estimate of S$3.01/share, based on an 18.5x P/E multiple, we now peg our estimate of STE’s FY12 EPS to its historical average forward P/E multiple of 19x to arrive at a fair value of S$3.32/share. Maintain BUY.

ST Engg

Phillip Securities Research on a Jan 11

Phillip Securities Research in a Jan 11 research report says: "Being one of the largest players in the industry, we opine that STE would be able to ride on the long term growth in demand for MRO work. STE would also benefit from the shift in MRO work towards lower cost bases.

"While the Aviation MRO industry could experience some near term headwinds, we expect STE to sail through comfortably with its exposure to the less cyclical defence business and strong order book of $11 billion. Long term Aerospace contracts worth at least $3.7 billion, by our estimates, would provide future revenue visibility.

"At the current price, STE is trading below its historical average P/E multiple of 20X and only slightly above levels reached during the past 2 crisis levels of 15X. The stock would also yield >5% on our forecasted dividends, which looks favourable against a paltry 10yr SGS bond yield of 1.6%. Target price of $3.13. ACCUMULATE."

Transport Sector

OCBC Research 23 Dec


Transport Sector: Likely bumpy ride ahead – seek defensives

Summary: The uncertain economic outlook ahead continues to weigh down on business confidence, which in turn negatively impacts global travel and trade volume. Weak demand outlook and high current fuel prices raise concerns on both the aviation and shipping sub-sectors and we are UNDERWEIGHT on both these sectors. While the weakness seen in the aviation sector may filter down, we are NEUTRAL on the aviation service providers. The outlook on these service providers is still healthy because air traffic and global aircraft fleet should continue to grow over the longer term. We are OVERWEIGHT the land transportation sub-sector in Singapore because it has no viable large-scale substitute. We prefer ST Engineering [BUY, FV: S$3.01], due to its diversified revenue streams, and SMRT Corp [BUY, FV: S$2.04] for the defensive nature of its business.