• Decent set of results
• Aiming from growth amid stability
• Div yield ~4.4%

2Q18 Results Within Expectations

Singapore Technologies Engineering (STE) reported a 3.3% YoY drop in revenue to S$1.65b and a 10.0% increase in net profit to S$117.5m in 2Q18, such that 1H18 net profit accounted for about 44% of our full year estimates.

Results were within expectations; as a reference, 1H17 net profit had accounted for 41% of FY17 net profit. 2Q bottom-line was driven by Aerospace, which saw a 26% YoY rise in net profit to S$66.6m, while Electronics saw a 22% increase to S$46.7m.

Land Systems saw a 3% fall to S$20.4m while Marine generated net profit of S$9.2m instead of a net loss in 2Q17. The “Others” segment incurred higher losses of S$25.4m with the one-time interest cost accrued for the early redemption of the group’s outstanding notes and lower contribution from Miltope. Commercial sales and defence sales accounted for 72% and 28% of STE’s 2Q18 revenue, respectively.

Aerospace and Electronics the Main Drivers

The Aerospace segment’s performance was boosted by the gain on divestment of an associate, Airbus Helicopters SE Asia, as well as share of higher profits from associates and JVs. We estimate the divestment gain for the former to be about S$9m.

For Electronics, earnings were driven largely by higher gross profit from favourable sales mix and lower operating expenses. Land Systems saw lower revenue, higher operating expenses and lower share of profits from associates and JVs.

Finally, Marine had a better performance from both local and US operations, though we estimate the workload in the US is still not sufficient to cover overheads.

Also Aiming for Growth Amidst Stability

The group’s order book remained strong at S$13.4b, and STE expects to deliver S$2.7b of orders in the rest of this year. Looking ahead, the group aims to

1. grow its Smart City revenue of S$1b to more than double by 2022, and
2. grow the core and other business segments with CAGR of 2-3x global GDP growth rate over the next five years.

An interim dividend of 5.0 S cents was declared, same as last year. We maintain our FCFF-based fair value estimate of S$3.90.

Source: OCBC Research - 10 Aug 2018