• 1H PBT to be lower YoY
• But 2H recovery seems likely
• Valuations more attractive; potential 11% total return

1Q16 earnings tracking below forecast

Singapore Technologies Engineering (STE) reported its 1Q16 revenue of S$1,627.1m (+8% YoY), in line with our forecast (meeting 25% of FY16 estimate); STE saw higher revenue from Aerospace (+27%) and Electronics (+28%), but mitigated by lower revenue from Land Systems (-18%) and Marine (-24%).

However, PBT slipped 13% to S$130.4m and PATMI dropped 15% to S$110.2m, both meeting 21% of our full-year forecasts, hence slightly weaker than expected; PBT for Aerospace was comparable and Electronics +13%, but Land Systems dropped 28% and Marine tumbled 85%.

Outlook remains cautious; 1H PBT likely lower

With the uncertainty economic environment likely to persist, management expects 1H16 PBT to be lower than that of 1H15, even though revenue is likely to be higher. Specifically, revenue for both Aerospace and Electronics sectors are likely to be higher, while PBT is expected to be comparable; but for Land Systems and Marine sectors, both revenue and PBT are expected to be lower.

Buttressed by S$11.5b of order book

Nevertheless, barring unforeseen circumstances, management believes FY16 revenue to still be higher and PBT to be comparable to FY15, as per its previous guidance. One of the reasons for its cautious optimism probably comes from its healthy order book of S$11.5b (as of end Mar), of which, it expects to deliver about S$3.0b in the remaining months of 2016.

Management also highlights its ample cash balance of S$1.5b, which it could use to expand its business, as well as make strategic acquisitions. Some of the areas that STE is looking into could include cyber security and homeland security.

Upgrade to BUY with unchanged S$3.24 fair value

With company maintaining its FY16 guidance, we do not see the need to adjust our estimates for now, as well as our S$3.24 fair value (19x FY16F EPS). But as the share price has taken quite a tumble of late, valuations are starting to look fairly attractive now; hence we upgrade our call to BUY for a potential total return of 10%.

Source: OCBC Research - 16 May 2016