Singapore Technologies Engineering’s (STE) 1Q17 revenue declined 5.4% YoY to S$1539.2m, mainly due to lower revenues from the Aerospace (-12%), Land Systems (-14%) and Marine (-16%) sectors, but offset by the Electronics (+14%) sector.

However, even as group 1Q17 gross profit grew 8.6% YoY to S$317.2m, PBT only increased 5.1% to S$137.0m mainly due to: 1) a 47% drop in other income as a result of lower wage credit, 2) 39.2% decline in share of results from associates and JVs, but offset by 3) a 55.5% fall in net finance costs for the quarter.

By key business sectors, STE’s 1Q17 group PBT margin rose 1.0ppt YoY to 9.4%, lifted mainly by improvements at its aerospace sector (+2.0ppt) due to higher contribution from the EFW and Marine sector (+3.4ppt) on better performance from shipbuilding from both U.S. and local operations.

Consequently, as tax expenses rose 37.7% YoY to S$27.0m, 1Q17 PATMI missed our expectations as it declined 6.1% to S$103.4m, which formed 20% of our FY17 forecast. Looking ahead, STE is guiding for FY17 revenue to be comparable, while PBT is expected to be higher than that of FY16, respectively.

Pending more details at the analyst briefing later, maintain HOLD but we put our S$3.20 fair value under review..

Source: OCBC Research - 12 May 2017