• Margins dragged by weak marine sector
• 2Q17 dividend maintained at 5.0 Scents
• Guided for comparable PBT for FY17

1H17 Formed 44% of Our FY17 Forecast

Singapore Technologies Engineering’s (STE) 1H17 revenue grew 1.4% YoY to S$3295.4m, mainly driven by higher revenues from the Electronics (+27%) sector, but offset by the Marine (-26%), Aerospace (-4%), and Land Systems (-6%) sectors. The strong revenue growth in the electronics sector was largely due to modification of estimates of revenue recognition for long-term contracts.

However, STE’s 1H17 PBT fell 4.6% YoY to S$286.8m mainly due to:

1. a 52.1% drop in other income as a result of an absence of a divestment gain recorded in the same period last year, and
2. provisions made as a result of higher costs anticipated for two shipbuilding projects (marine sector).

By key business sectors, STE’s 1H17 group PBT margin decreased 0.5ppt YoY to 8.7%, impacted mainly by its electronics sector (- 1.9ppt) due to unfavourable sales mix and marine sector (-4.9ppt) on weak industry conditions and weaker U.S. operations. Consequently, 1H17 PATMI missed our expectations as it declined 9.5% to S$215.0m, which formed 44% of our FY17 forecast.

Revised Guidance Downwards on Weak Marine Sector

Over the near-to-medium term, we expect group earnings to be supported by its strong order book of S$13.5b as the aerospace and electronics sectors recorded strong new orders during 2Q17. However, on weak performance from the marine sector, STE has revised its guidance for FY17 PBT from higher to comparable to FY16, while maintaining its guidance for FY17 revenue to be comparable to FY16.

Over the longer-term, we continue to be positive on STE’s electronics sector exposure to high growth areas relating to Singapore’s smart nations initiatives (improved ICT capabilities post-acquisition of SP Tel), cyber security, and smart city business.

Maintain HOLD on Lower FV of S$3.61

All considered, we pare our FY17/18 PATMI forecasts by 9%/7% on missed 1H17 results, which decreases our DCF-derived FV from S$3.70 to S$3.61. Maintain HOLD on STE.

Source: OCBC Research - 14 Aug 2017