16
July 2002
S
T Engineering
Recommendation:
BUY
Price: S$1.92
Met
Expectations; Earnings Visibility Intact
Results
are in line. 1H02's net gain of S$81m is in line with
market expectations and management's guidance but beat
our projected S$78m by 3%.
Sales
grew 7% yoy but fell 1% qoq. EBITDA fell 1% yoy, after
a 0.5% gain in 1Q02. Net earnings fell more 4% yoy and
3% qoq, due mainly to lower interest income (-22% to S$14.6m).
Interest income accounted for 13% of group pre-tax, down
from 22% in 1Q02. The aerospace division was the primary
cause of the EBITDA decline. Other divisions posted EBITDA
gains of 19-24%.
Operating
cash flow was a negative S$58m in 1H02 (from +S$210m in
1H01). One reason could be a drop in customer advances
for secured orders. This could point to a lower cash balance
(hence interest income) going forward.
At
the analysts' briefing, management talked about integrating
the capabilities of its 4 divisions and disposing of non-core
assets. We expect rationalisation of costs and operations
to be carried out in the next 18 months.
Maintain
BUY. The stock's trading at 16.2x FY02 and 14.8x FY03
PEs, a warranted premium to the industry's 8-9x because
of its strong earnings visibility for the next 3-4 years
(order book of S$5.2b). Dividend payout will stay high,
especially with the recent ERC recommendation of a one-tier
corporate taxation system from 1 Jan 03. While the new
system has yet to be mapped out, the company can effectively
pay a dividend equivalent to EPS, provided there are sufficient
reserves. With this, ST Engineering will remain an attractive
yield play, with current yield at about 5%.
