• Core FY16 within expectations
• Maintain FY16 total dividend at 15 Scents
• Healthy order book of S$11.6b

Core FY16 PATMI formed 99% of our forecast

Singapore Technologies Engineering’s (STE) FY16 revenue rose 5.5% to S$6683.7m, mainly driven by higher revenue from the Aerospace (+19%) and Electronics (+10%) sectors. However, group PBT fell 6.3% to S$590.6m, dragged by: 1) Land Systems sector (-66%) mainly due to a S$61.1m (net of non-controlling interest) one-off charge relating to the closure of its road construction equipment business in China but partly offset by a S$10.4m divestment gain of another China subsidiary, and 2) Marine sector (-15%) on weaker shipbuilding performance from both local and U.S. operations. As a result, FY16 PATMI fell 8.4% to S$484.5m. Excluding the one-off impairment charge and divestment gain, core FY16 PATMI came in within expectations and would have been 1.2% higher at S$535.2m, which formed 99.0% of our FY16 forecast.

Healthy order book but near-term outlook remains muted

STE has guided for FY17 revenue to be comparable while PBT to be higher than that of FY16. However, stripping out FY16 one-off items, we expect FY17 PBT to be comparable. STE expects: 1) Aerospace revenue and PBT to be comparable, 2) Electronics revenue and PBT to both be higher driven by sales recognition from various projects across its sub-segments, 3) Land Systems revenue to be comparable while PBT to be higher having disposed its loss-making businesses in China in FY16, and, 4) Marine revenue to be comparable while PBT to be lower given the headwinds in the oil & gas industry.

In our view, the Aerospace sector will continue to face headwinds over the next two years, coupled with pressure on margins through the start-up phase of its Passenger-to-Freighter (PTF) programmes. Electronics sector will be the key growth driver as it continue to build up its digital capabilities (e.g. cyber security, smart city solutions etc.), which aligns with one of Singapore’s key economic strategies identified by the Committee on the Future Economy (CFE).

Maintain HOLD with unchanged FV of S$3.20

With in-line results, we keep our forecasts largely unchanged and introduce FY18 estimates. Maintain HOLD, with the same FV of S$3.20, supported by 4.4% forward dividend yield.

Source: OCBC Research - 17 Feb 2017