Singapore Company Focus
ST Engineering
Refer to important disclosures at the end of this report
Bloomberg: STE SP | Reuters: STEG.SI
DBS Group Research . Equity
8 Apr 2016
The smart bet
BUY
Last Traded Price: S$3.23 (STI : 2,813.59)
Price Target : S$3.65 (13% upside) (Prev S$3.40)
Reason for Report : Company update
Potential Catalyst: Smart city order wins, M&A
Where we differ: Slightly more bearish on earnings estimates
Analyst
Suvro SARKAR +65 6682 3720 suvro@dbs.com
Price Relative
S$
Relative Index
209
4.4
189
3.9
169
149
3.4
129
2.9
109
2.4
Apr-12
Apr-13
ST Engineering (LHS)
Forecasts and Valuation
FY Dec (S$m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Apr-14
89
Apr-16
Apr-15
Relative STI INDEX (RHS)
2014A
6,539
835
651
532
532
(8.4)
17.1
17.1
(9)
17.1
15.0
68.4
18.9
18.9
16.1
11.5
4.6
4.7
CASH
25.0
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2015A
6,335
834
630
529
529
(0.5)
17.1
17.1
0
17.1
15.0
68.7
18.9
18.9
21.5
12.2
4.6
4.7
0.0
24.8
2016F
6,576
872
651
537
537
1.6
17.3
17.3
2
17.3
15.0
71.1
18.6
18.6
15.8
11.7
4.6
4.5
0.0
24.8
2017F
6,572
892
668
551
551
2.5
17.8
17.8
2
17.8
15.0
73.8
18.2
18.2
14.6
11.3
4.6
4.4
CASH
24.5
B: 7
17.0
S: 1
17.3
H: 4
ICB Industry : Industrials
ICB Sector: Aerospace & Defense
Principal Business: An integrated engineering group providing
solutions and services in aerospace, electronics, land systems and
marine sectors.
Source of all data: Company, DBS Bank, Bloomberg Finance L.P
ed: TH / sa: YM
ASIAN INSIGHTS

Visibility remains robust despite some slowdown in
marine and land systems orders in 2015

Electronics division is plugged into smart city trend;
expect more contracts in near term

Aerospace division has started to reap benefits of
investments in new growth areas

Maintain BUY with higher TP of S$3.65
Long-term growth initiatives pave the way forward in MRO. The
Aerospace division has seen robust traction in the cabin interiors
and VIP completion businesses, while it continues to add
capabilities in the more mature airframe MRO space. It is also
continuously enhancing its passenger-to-freighter conversion
capabilities to serve a broader market.
The Electronics division is positioned to capitalise on the Smart
Nation revolution in Singapore, with projects worth more than
S$1bn likely to be tendered in the near future, according to our
estimates. Further, the launch of its TeLEOS-1 satellite last
December is expected to herald in a new space-centred growth
channel for the division, which management expects to be an
important part of the company’s growth story going forward.
Orderbook at decent levels. The Group’s orderbook of S$11.7bn
remains relatively stable, and covers close to two years of
revenue, securing decent visibility going forward. Order wins
announced in 2015 were at par with 2014 levels, though Marine
and Land Systems divisions have been slow.
Good returns for investors should continue. YTD in 2016, ST
Engineering's (STE) share price has outperformed the broader STI
Index by about 10%, which can be attributed to its strong
defensive nature, healthy balance sheet and secure dividend
promise in an environment of uncertainty and volatility in the
equity market. We believe STE still presents one of the more
compelling investment cases compared to the other defensive,
dividend yield names listed on the SGX, where long-term growth
may not be as steady or as visible. Maintain BUY, TP revised up to
S$3.65 owing to higher preference for yield in the market. At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Temasek Holdings Pte Ltd (%)
Aberdeen Asset Management (%)
Capital Group (%)
Free Float (%)
3m Avg. Daily Val (US$m)
3,105
10,028 / 7,413
51.3
6.0
5.0
37.7
8.9
VICKERS SECURITIES
Company Focus
ST Engineering
INVESTMENT THESIS
Profile
ST Engineering (STE) is an integrated engineering group in
the aerospace, electronics, land systems and marine sectors.
The company has over the years diversified its businesses and
geographies.
Rationale
Electronics and Aerospace are key growth drivers. Although
it lost out recently on the next-generation ERP project, the
Electronics division is well positioned to benefit from other
Smart Nation projects in Singapore, going forward.
Additionally, recent focus on space-related technology and
robotics hold promise as longer-term growth drivers for the
company. Targeted new investments in Aerospace division
also provide potential upside in the medium-term.
Expect steady earnings and dividends in near term. The
group’s orderbook of S$11.7bn as of end-2015 remains
relatively stable and covers slightly less than two years of
revenue, securing decent visibility going forward, despite a
slowdown in Marine and Land division orders in 2015. We
believe STE will be able to maintain steady earnings and
dividends in the near term, and maintain its status as a safe
haven dividend play amidst volatile market conditions.
M&A potential remains untapped. ST Engineering sits on a
very healthy balance sheet. We believe it should make use of
its balance sheet more efficiently to target ROE and EPSaccretive acquisitions. Among other ideas, an attempt to
boost its leadership position in the airframe MRO market by
merging with compatriot SIA Engineering
Valuation
We maintain our BUY call with a higher TP of S$3.65, based
on a blended valuation framework to factor in both earnings
growth and cash-generative nature of the business.
Risks
Declining defense budgets in the West. Austerity
programmes in Europe and planned US spending cuts create
the risk of delays to some defense programmes that STE may
be bidding for.
Commercial vehicle businesses face headwinds. The growth
of STE’s commercial vehicle operations in China has been
affected by weak demand and high inventory levels. Its Brazil
operations have also been affected by withdrawal of
subsidies for purchases of construction equipment.
Protracted slowdown in shipbuilding. The traditional shipping
sector has been plagued by overcapacity for some time now,
while the slide in oil prices also affects demand for offshore
vessels. Visibility on demand recovery is low at this point.
Source: DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 2
Company Focus
ST Engineering
Highlights
Electronics and Aerospace are key growth drivers. Although it
lost out recently on the next-generation ERP project, the
Electronics division is well positioned to benefit from other
Smart Nation projects in Singapore, going forward.
Additionally, recent focus on space-related technology and
robotics hold promise as longer-term growth drivers for the
company. Targeted new investments in Aerospace division also
provide potential upside in the medium term.
Electronics division profitability trend is encouraging
S $m
250.0
S$bn
7.0
5.9
6.0
5.0
3.0
2.0
3.4 3.2
2.7
2.6
4.2 4.0
4.1
3.9
4.0
1.8
1.7
1.0
150.0
115
128
137
152
FY15
FY14
Group’s orderbook remains relatively stable
S$bn
14.0
50.0
12.0
0.0
09
FY13
Source: Company, DBS Bank
94
08
FY12
FY11
FY10
FY09
191
FY08
184
FY07
170
FY06
200.0
FY05
0.0
CAGR 11%
100.0
Announced order wins remained steady in FY15
10
11
12
13
14
15
10.3
9.5 10.0
10.0
Note: PBT figures for ST Electronics
Source: Company, DBS Bank
8.0
Expect steady earnings and dividends in near term. The
group’s orderbook of S$11.7bn remains relatively stable and
covers slightly less than two years of revenue, securing decent
visibility going forward, despite a slowdown in Marine and
Land division orders in 2015. We believe STE will be able to
maintain steady earnings and dividends in the near term, and
maintain its status as a safe haven dividend play amidst
volatile market conditions.
4.0
6.0
11.5
12.3 12.1
13.2
12.5
11.7
7.4
5.4
2.0
0.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Company, DBS Bank
ST Engineering – FY16 revenue and profit guidance (barring unforeseen circumstances)
Group
FY16 revenue expected to be higher, while PBT is expected to be comparable to that of FY15
Aerospace
FY16 revenue expected to be higher, while PBT is expected to be comparable to that of FY15
Electronics
FY16 revenue expected to be higher, while PBT is expected to be comparable to that of FY15
Land Systems
FY16 revenue expected to be comparable, while PBT is expected to be lower than that of FY15
Marine
FY16 revenue expected to be higher, while PBT is expected to be lower than that of FY15
Source: Company
ASIAN INSIGHTS
VICKERS SECURITIES
Page 3
Company Focus
ST Engineering
Electronics arm will be the main growth driver
STE's electronics arm is poised to ride the wave of smart
cities. Singapore is poised to be among the global leaders in
adoption of Internet of Things (IoT) and big data as it pushes
its Smart Nation programme to resolve challenges in the
utilities, transport and healthcare space through technology.
Given the government’s proactive approach, we believe STE's
electronics division is well positioned to secure Smart Nation
projects in the near future.
What is the hype about smart cities? “Smart city” is a
term we will be hearing a lot more of in the coming years. It is
thought that by 2020, this will be a US$400-500bn market, so
the potential is huge. The idea of a smart city is to
embed the IoT into the infrastructure or the environment in
which we live to achieve a better quality of life and address
the challenges of increasing urbanisation and population
growth in cities.
Current advances in technology and data collection are
on course to making the IoT a reality, and proliferation of
IoT will lead to city planning authorities to develop data-driven
systems for transport, waste management, law enforcement,
and energy use, among others, to make these services more
efficient and improve the lives of citizens.
IoT is a network of things that are connected to each
other and refers to an ecosystem comprised of things,
connectivity and services including data analysis. Things
(products) will have sensors to make them intelligent and relay
changes in their environment, which can then be analysed
remotely. The growth in IoT-enabled devices has been fuelled
by the declining cost of sensors, connectivity and data
processing power. Smartphone revolution has resulted in a big
scale of production for these components; bringing down the
cost of components required for IoT. The software needed to
analyse this data has improved gradually and companies
are using it to boost operations and seek out new business
models.
Internet of Things (IoT) Value Chain
Source: Arthur D Little
ST Electronics will largely be using its capabilities as a system
integrator and service provider to serve the smart city market
through the adoption of IoT.
Service Providers – They bring together the hardware, the
connectivity and the platform to provide end-to-end solutions to
different verticals. Most importantly, they take care of bundling
the solutions, setting the tariffs, billing and customer care.
System Integrator – The smart object has to be integrated with
the platform and its relevant applications. In most cases today,
this integration is cloud-based, meaning that a chosen
application platform will support the integration through
standardised application programming interfaces (APIs) as a
consequence.
ASIAN INSIGHTS
VICKERS SECURITIES
Page 4
Company Focus
ST Engineering
Market opportunity for IoT is huge. Gartner forecasts
installed base of 25bn connected things in 2020 compared to
4.9bn in 2015, growing at a 33% CAGR. This excludes
smartphones and PCs, but includes dedicated objects, such as
vending machines, jet engines, connected soap dispensers,
etc. In terms of annual shipments, Gartner forecasts 1.6bn
connected things in 2015, rising to 8.3bn in 2020. The
highest volume shipments are expected to come from
connected LED interior light bulbs, followed by smart TVs and
automotive infotainment systems.
The incremental cost of hardware and software is relatively
small while the services opportunity (including data analytics)
is much larger. Gartner forecasts IoT to support total services
spending of US$69.5bn in 2015, rising to US$263bn by 2020
at a 23% CAGR. Gartner forecasts that the highest volume
will come from connected LED interior light bulbs for business
applications in 2020. Government legislation will be key to
encouraging green buildings and smart lighting solutions
which ensure that lights are appropriately dimmed or
switched off according to occupancy and/or time of day.
IoT-related service revenue forecast - Gartner
Source: Gartner
Smart city programmes will spur IoT adoption in Asia.
Singapore, South Korea and even China are among early
adopters of the smart city concept utilising IoT. According to
Korea Machine Tool Manufacturer’s Association (KOMMA),
the government will invest a total of 5.6tn (~US$5bn) on by
2020 and nurture new industries to achieve US$100bn in
exports by 2024. The government had allocated KRW1tn
(~US$930m) for 2015. South Korea targets to apply IoT to the
entire area of Seoul city by 2020.
Singapore is leveraging Smart Nation programme to resolve
challenges in the utility, transport and healthcare space.
Smart Nation programme is already in its “build” phase with
15 pilot projects being awarded to various vendors in 2015.
Details are published on the next page.
ASIAN INSIGHTS
China’s central government has selected 202 cities, including
Beijing, Guangzhou, Hangzhou and Shanghai, to pilot smart
city projects to collect, store and analyse information related
to transportation, electricity, public safety and environmental
factors. It leads the world in the adoption of M2M services,
with 74m connections at the end of 2014, representing
almost a third of the global base, according to GSMA. In
conjunction with this, the government has also introduced a
strategy, named “Internet Plus”, based on innovation, smart
technology, the mobile Internet, cloud computing, Big Data
and the IoT. China has unveiled a 10-year plan to upgrade its
manufacturing capacity, named “Made in China 2025”.
China plans to invest Rmb8.02tn in the next few years to
modernise and transform manufacturing.
VICKERS SECURITIES
Page 5
Company Focus
ST Engineering
Singapore is pushing towards becoming the world’s first
Smart Nation. Singapore’s Smart Nation Programme will
harness IT, networks and data to increase standards of living,
productivity and responsiveness to people’s needs and
aspirations. Smart Nation will rely on the IoT and big data.
Singapore’s small size gives it an edge in the implementation
of the Smart Nation, as the government is proactively
encouraging and helping build conducive regulatory policies
and infrastructure to ensure its success.
An IoT Standards Outline in support of Singapore's Smart
Nation initiative has been laid out and announced in Aug
2015. The IoT Standards Outline focuses on three types of
standards, namely sensor network standards, IoT foundational
standards and domain-specific standards. Standards will play a
critical role to create an environment where government
agencies, planners, developers, and manufacturers come
together to develop new technologies and smart solutions
efficiently.
The Singapore Government is keen to promote
Heterogeneous Network (HetNet) technology for Smart
Nation. HetNet network services will be maintained by
switching between different types of networks such as Wi-Fi
and 4G and 3G. It is meant to mitigate capacity crunch,
optimise overall network capacity to improve quality of
service, and facilitate intra-operator roaming that improves
network resiliency.
There are currently five main areas of focus. Singapore’s
Smart Nation project has entered the “build” phase, with a
few key areas of focus – Smart Health-Assist, Smart
Logistics/Mobility, Smart HDB Town Framework and Smart
Tech Challenges. These are described in more detail below.
Singapore Smart Nation focus areas
Smart Nation
Smart HealthAssist
Smart
Transport
Smart
Logistics
Smart HDB Town
Framework
Smart Tech
Challenges
Focus Area
Key Elements
Smart Health-Assist
 Use of tele-health to tackle challenges of limits of physical healthcare infrastructure and ageing
population. Trials of remote healthcare systems are on
 Need to develop better sensors for critical health metrics and better decision support systems
Smart Transport
 Replace existing road pricing system of gantries with satellite-based system
 Real-time traffic information in vehicles
 Monthly subscription based Mobility-as-a-Service app to get around the city more efficiently
Smart Logistics
 Smart logistics platform will allow cargo owners, freight forwarders and ground handlers to track
and manage cargo in real time
Smart HDB Town






Smart Tech Challenges
 Mobilising the wider citizen community to co-innovate solutions to tackle urban challenges
 One of the first challenges will be on video analytics, and how audiovisual data can be used in
public safety (such as alerting stakeholders of unusual crowd activity)
Smart Planning of HDB estates using computer simulations and data analytics
Monitor environmental factors such as temperature and humidity to create better living areas
Intelligent lighting solutions and car parking solutions
Optimise maintenance cycles through observation of usage patterns of common areas
Better planning of waste collection cycles
Monitor energy consumption in homes and access smart home applications
Source: DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 6
Company Focus
ST Engineering
Pilot project of Smart Nation in Jurong is underway. The
Jurong Lake area in Singapore has been chosen as a testbed
for major projects and technologies for the Smart Nation
vsision. ST Electronics has already secured seven out of 15
pilot projects in Jurong Lake district for the Smart Nation
project, including 1) Smart Traffic Management System, 2)
Location Information in Urban Environment, 3) Estate Energy
Management System, 4) Smart Outdoor Lighting, 5) Smoking
Detection, 6) Smart Walk and 7) Smart Phone as Sensor.
STE has strong competence in smart city building blocks.
ST Electronics has a long track record in providing both
hardware as well as system integration solutions as part of its
Smart City capability build-up. It has already deployed or
piloted sensor networks and smart utilities in cities like Paris,
California, Texas, Sao Paulo, Auckland, Eliat (Israel) and
Singapore. It has also implemented intelligent traffic solutions
in various Chinese cities like Beijing, Chengdu and Wuhan. ST
Electronics also offers solutions like Smart Waste
Management, Smart Water Management, Security
Management Systems and Smart Healthcare Systems.
Revenue potential from smart city programmes.
According to the Gartner forecast on spend on IoT related
services, we estimate that the total spend from 2016-2020
(excluding consulting and consumer services spending) would
be roughly US$590bn. If STE manages a 1% market share, its
revenue from the smart city programmes would be roughly
around US$5-6bn (S$7-8.5bn) over the next five years, of
which around S$1bn worth of contracts could be won in the
near term.
ST Electronics’ capabilities in the smart city domain
Focus Area
Capabilities
Smart Utilities




Smart Environment
 Environment sensors management
 Smart waste management
 Satellite imagery services
Smart Analytics
 SERIS solution suite designed to help governments, agencies and enterprises manage and respond
to growing economic, social and environmental challenges around the world
Smart Mobility





Smart Infrastructure
 Smart building management systems
 Communications & sensor networks
Smart Community





Communications infrastructure
Learning management systems
Simulation and game-based learning
Community portals
Mobile applications
Smart Security





SERIS solution suite for public safety
Unified communication suite
Integrated security management systems
Area surveillance and intrusion detection
Cyber security
Smart Healthcare
 Integrated healthcare infrastructure
 Smart hospital management
 Tele-health and vital signs monitoring
Advanced metering infrastructure
Smart building energy management
Smart water management
Smart streetlight management
Intelligent rail transport solutions
Intelligent road transport solutions
Transport fleet management
Congestion pricing and management
Driver and commute information systems
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 7
Company Focus
ST Engineering
Example of ST Electronics’ expertise and capabilities in smart city solutions
Source: Company
ST Electronics also aiming to be a significant emerging
player in the global space industry. In December 2015, ST
Electronics successfully launched TeLEOS-1, Singapore’s First
Commercial Earth Observation Satellite, into a 550km Near
Equatorial Orbit. TeLEOS-1 is the first made-in-Singapore
commercial satellite, designed and developed at ST Electronics
Satellite Systems Centre, and was launched by India’s Polar
Satellite Launch Vehicle (PSLV-C29.
ST Electronics can now offer satellite imagery and valueadded services to customers worldwide. TeLEOS-1 will
offer up to six daylight imaging opportunities per day with a
mean revisit time of 12 to 16 hours as compared to two
daylight imaging passes per day and mean revisit of three to
five days for conventional sun-synchronous earth observation
satellites. With its optical payload, TeLEOS-1 can expeditiously
contribute to high-responsive applications in maritime security
and safety, Humanitarian Aid and Disaster Relief and
environmental activity verification.
Recognising the growing local and global demand for remote
sensing satellites and geospatial services, ST Electronics has
embarked on this new space business operation through a
team of experienced professionals to deliver Earth observation
products and solutions under the signature brand,
AgilSpace™.
Services to be offered through new satellite imagery business
Source: Company
ASIAN INSIGHTS
VICKERS SECURITIES
Page 8
Company Focus
ST Engineering
Aerospace division pursuing several initiatives
Cabin retrofitting and VIP reconfigurations will be a key
business area, going forward. In 2011, the Group launched
AERIA Luxury Interiors in the US, a unit that focuses on
refurbishing and outfitting of VIP aircraft. AERIA has now
become an approved Boeing Business Jet completion centre and
has already redelivered its first green aircraft contract from a
European customer, while remaining on track with the nose-totail Boeing 777 cabin completion project. As part of its business
expansion plan, the VIP completions facility started work to add
14,000 sq ft of space to house new cabinet and upholstery
shops, as well as an additional building for the design, sales and
marketing teams. This new expansion is expected to be
completed in mid-2016.
ST Aerospace has also recently extended its VIP aircraft interior
business to Singapore, by unveiling a new 2,690-sqm facility at
Seletar Aerospace Park in Singapore to target demand for
bespoke cabin interiors from Asian and Middle Eastern
customers. In 2016, ST Aerospace’s VIP aircraft interior business
gains traction by securing five major maintenance and
refurbishments contracts – for three Boeing Business Jets (BBJ),
one Airbus Corporate Jet (ACJ) and a Boeing 757, from VIP
customers in Asia Pacific and the US. Aircraft arrivals are
scheduled through the first three quarters of 2016. ST
Aerospace has also established an aircraft seat JV in Singapore
to complement its cabin interior business.
Key initiatives being pursued
Venture
Location
Key Business
Updates
San Antonio, Texas
Integrated Cabin Interiors
AERIA Luxury Interiors (a
Capable of handling entire VIP aircraft
First green Boeing Business Jet aircraft
division of VT San
completion process, from design, engineering,
redelivered in Dec 2015
Antonio)
fabrication, installation to certifications and
testing
DRB Aviation
San Antonio, Texas
Consultants (acquisition)
DRB Aviation specialises in the design,
Complementing VIP completion and
programme management and certification of
cabin interiors business, now absorbed
aircraft interior, avionics and structural repair
into VT San Antonio Aerospace
projects. As a holder of Organisation
Designation Authorisation awarded by FAA, DRB
is authorised to issue FAA Supplemental Type
Certificates with minimal oversight from FAA.
Volant Aerospace
Washington
Aircraft interior specialist
(acquisition)
Ownership of a Supplemental Type
Certificate (STC) awarded by the
European Aviation Safety Agency for a
full cabin retrofit programme involving
six A330 aircraft for an international
carrier
Turbo Mach
San Antonio
Designer and manufacturer of composite
Will enhance the turnkey aircraft cabin
(acquision of assets and
components and assemblies for the aerospace
refurbishment business
trade names)
industry
New VIP Aircraft Interiors
Singapore
Centre in Singapore
Brings full suite of VIP luxury cabin interior
Two projects, involving an A319 ACJ and
design, engineering, installation and
a Boeing 737 BBJ, will take place at its
maintenance services to the region, serving
new VIP interior centre in Singapore
customers from across Asia Pacific and the
Middle East
ST Aerospace Aircraft
Singapore
Seats (JV with Tenru
Corporation)
End-to-end design and manufacturing of a
Marketed as part of ST Aerospace’s
range of aircraft seating solutions
global network for integrated cabin
interiors
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 9
Company Focus
ST Engineering
Expanding aircraft and engine leasing business to generate new
maintenance streams. ST Aerospace has commenced its aircraft
leasing business with the acquisition of two aircraft in FY15,
and added a third in FY16. It has recently decided to collaborate
with Sojitz Corporation of Japan in its aircraft leasing business,
by divesting a 50% stake in Keystone Holdings, which is the
holding company for STE’s aircraft leasing investments.
Engine MRO is another area of focus for STE. Global engine
MRO is the largest MRO segment, and is expected to maintain
the highest growth rate of 3.5% CAGR over the next 10 years.
STE is well positioned for the growth in engine MRO with tieups with the top two engine manufacturers – CFM and GE.
CFM and GE are expected to further increase their market share
from 59% in 2012 to 64% by 2022.
Launched A320/A321 freighter conversion programme – further
strengthening leadership position in PTF. ST Aerospace has
completed additional investment in EFW - its European MRO
centre in Dresden in collaboration with Airbus – thus taking its
stake to 55%. Following this, EFW will become a subsidiary of
ST Aerospace. After successfully launching the A330 Passengerto-Freighter programme in 2013, the outfit has now launched
the A320/321 P2F programme. This will add to STE’s existing
track record of PTF capabilities – MD11, B767-300, and B757200 (14 &141/2 pallet). STE has also received the supplemental
type certificate from US FAA and China’s CAAC for the 15Pallet B757-200SF conversion.
Commercial pilot training is a new business. ST Aerospace’s
flight training academy is the only training centre in Singapore
to be equipped with an Airbus A320 full flight simulator,
certified by the European Aviation Safety Agency. ST Aerospace
has signed a five-year agreement with a Middle Eastern
customer for a Multi-crew Pilot Licence programme, while
securing a two-year training agreement with an Asian airline for
dry and wet simulator training solutions for pilots. A three-year
contract was also sealed with Tigerair Singapore for the
provision of simulator training services. Additionally, its USbased flight school has also received its first batch of students in
Hondo, Texas for pilot training.
Key initiatives being pursued
Venture
Location
Key Business
Updates
Expansion of heavy maintenance business
EFW
Passenger-to-Freighter (P2F) conversion
A330P2F and A320/A321P2F
(Increased stake from
Dresden, Germany
programme for A330 and A320/A321 family
programmes to enter into service in 2017
35% to 55%)
aircraft
and 2018 respectively
EFW is also the exclusive supplier for composite
flat panels to Airbus for all Airbus aircraft.
Hondo Aerospace (setup)
Pensacola MRO Facility
South Texas
Green harvesting of aircraft parts, components
Continues to gain traction, securing
Regional Airport
and engines
several aircraft part-out contracts in 2015
Pensacola, Florida
ST Aerospace’s affiliate VT Mobile Aerospace
New facility to be ready by mid-2017,
Engineering has signed a MoU with the City of
complementing the Mobile facilities of ST
Pensacola to jointly explore the development of
Aerospace
(setup)
a satellite airframe facility at the Pensacola
International Airport
New hangars in Changi
Singapore/ China
and Guangzhou
Narrowbody hangars, heavy maintenance plus
B787 capability in Singapore added.
line maintenance (new business)
Second hangar in Guangzhou by end2016
Leasing solutions
Total Engines Asset
Singapore
Management
Provides engine leasing services for CFM56
Has placed out more than 20engines to
series engines and the IAE V2500 engine
date
(JV with Marubeni
Corporation)
Keystone Holdings
Keystone Holdings is the holding company for
Lease portfolio consists of three aircraft –
(50% JV with Sojitz
Singapore
aircraft leasing investments. Aims to build up a
one each of A320, B737NG, and A321
Corporation)
portfolio of mid-life and end-of-life aircraft
assets focused on Airbus A320 and Boeing
737NG family
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 10
Company Focus
ST Engineering
The stock remains a good bet
Good returns for investors should continue. YTD in 2016, STE's
share price has outperformed the broader STI Index by about
10%, which can be attributed to its strong defensive nature,
healthy balance sheet and secure dividend promise in an
environment of uncertainty and volatility in the equity market.
We believe STE still presents one of the more compelling
investment cases compared to the other defensive, dividend
yield names listed on the SGX, where long-term growth may
not be as steady or as visible.
The Group declared a final dividend (including special dividend)
of 10Scts for FY15, bringing total FY15 dividends to 15Scts. This
is the same as FY14 – and translates into a dividend yield of
4.7% based on the current share price, maintaining STE’s status
as a strong dividend yield play. Management maintains their
guidance of a 75-80% payout ratio as a sustainable target
going forward.
Given that STE stands to gain from US dollar strength arising
from possible Fed rate hikes, and its Aerospace MRO division
On the balance sheet front, the Group is no longer in a net cash
stands to benefit from airlines profiting from lower oil prices,
position as of end-FY15, but only just. In a departure from the
STE is plugged into the right global trends. Thus, STE continues
past, STE ended FY15 with a negligible net gearing of less than
to remain among our preferred picks, offering strong revenue
1%, as they have chosen to deploy cash reserves in investment
visibility from its healthy orderbook and steady earnings and
grade bonds and share buybacks in FY15 to improve returns on
dividend expectations. Appreciation of the US$, if sustained,
capital. Capex spend in FY15 was also slightly higher than
will provide earnings upside. Catalyst for stock performance will
usual, with higher R&D expenditure. Management is
come from sustained order win momentum. Maintain BUY, TP
comfortable with this change in capital structure though, and
adjusted upwards to S$3.65 owing to higher preference for
has not signalled an intention to pay down debt at this point in
yield in the market.
time. The bond investment portfolio is generally high-grade; any
investment below single-A rating has to have special approval.
ST Engineering – Blended Valuation Methodology
Method
Basis (FY16)
Parameter
P/E
537.3
16.0
8597
Div Yield (Market)
15.0
3.2
14538
WACC 6.7%
10690
DCF
Value (S$ m)
Average
11275
No of shares
3102
Value per share
3.65
Source: DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 11
Company Focus
ST Engineering
Key Assumptions
FY Dec
Aerospace sales growth
Electronics sales growth
Land Systems sales
Marine sales growth (%)
Segmental Breakdown
FY Dec
Revenues (S$m)
Aerospace
Electronics
Land Systems
Marine
Others
Total
PBT (S$m)
Aerospace
Electronics
Land Systems
Marine
Others
Total
PBT Margins (%)
Aerospace
Electronics
Land Systems
Marine
Others
Total
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
2013A
2014A
2015A
2016F
2017F
2.97
4.56
(2.5)
22.5
(0.9)
(4.1)
(5.3)
8.32
1.41
7.96
(0.1)
(28.6)
5.51
7.72
(2.5)
2.27
3.81
6.75
(3.4)
(17.9)
2013A
2014A
2015A
2016F
2017F
2,079
1,650
1,475
1,238
191
6,633
2,061
1,583
1,397
1,341
157
6,539
2,090
1,709
1,396
958
182
6,335
2,205
1,841
1,361
980
189
6,576
2,289
1,965
1,314
805
199
6,572
319
170
112
146
(18.1)
730
283
184
56.2
123
4.70
651
291
191
65.0
88.3
(4.6)
630
302
204
61.8
82.9
0.0
651
315
218
63.4
70.8
0.0
667
15.4
10.3
7.6
11.8
(9.5)
11.0
13.7
11.6
4.0
9.2
3.0
10.0
13.9
11.2
4.7
9.2
(2.5)
9.9
13.7
11.1
4.5
8.5
0.0
9.9
13.8
11.1
4.8
8.8
0.0
10.1
2013A
2014A
2015A
2016F
2017F
6,633
(5,201)
1,432
(712)
720
0.0
31.1
(20.9)
0.0
730
(138)
(10.7)
0.0
581
581
893
6,539
(5,221)
1,319
(711)
608
0.0
57.2
(14.3)
0.0
651
(114)
(5.0)
0.0
532
532
835
6,335
(5,053)
1,282
(694)
588
0.0
58.3
(16.3)
0.0
630
(98.7)
(2.6)
0.0
529
529
834
6,576
(5,228)
1,348
(727)
621
0.0
59.5
(30.4)
0.0
651
(111)
(2.6)
0.0
537
537
872
6,572
(5,225)
1,347
(711)
636
0.0
60.7
(30.4)
0.0
668
(113)
(2.7)
0.0
551
551
892
4.0
1.9
1.9
0.8
(1.4)
(6.4)
(15.5)
(8.4)
(3.1)
(0.2)
(3.2)
(0.5)
3.8
4.5
5.6
1.6
(0.1)
2.4
2.4
2.5
21.6
10.8
8.8
29.0
6.9
12.4
80.2
34.4
20.2
9.3
8.1
25.0
6.2
10.3
87.9
42.7
20.2
9.3
8.4
24.8
6.4
10.7
87.9
36.2
20.5
9.5
8.2
24.8
6.5
11.2
86.6
20.4
20.5
9.7
8.4
24.5
6.6
11.2
84.5
20.9
Margins Trend
12.0%
11.5%
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.0%
2013A
2014A
Operating Margin %
2015A
2016F
2017F
Net Income Margin %
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 12
Company Focus
ST Engineering
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
(18.2)
(2.1)
(8.0)
(7.3)
2.2
4.5
3.3
(3.8)
(2.9)
(0.6)
(2.8)
6.6
18.6
6.7
6.2
5.7
17.2
8.4
7.6
19.4
9.5
8.6
21.5
9.6
8.1
21.3
9.6
8.9
19.0
8.6
7.9
2013A
2014A
2015A
2016F
2017F
15%
10%
1,500
5%
0%
1,000
-5%
-10%
500
-15%
-20%
0
-25%
Revenue
4Q2015
19.0
3.5
8.5
15.6
20%
3Q2015
1,779
(1,441)
338
(185)
153
0.0
17.6
(3.9)
0.0
167
(23.4)
(2.3)
141
141
221
2Q2015
1,500
(1,181)
319
(175)
144
0.0
15.4
(4.6)
0.0
155
(22.3)
0.81
133
133
207
1Q2015
1,545
(1,212)
333
(185)
148
0.0
14.2
(3.9)
0.0
159
(34.0)
0.44
125
125
208
4Q2014
1,511
(1,219)
292
(149)
143
0.0
11.2
(4.0)
0.0
151
(19.0)
(1.5)
130
130
199
25%
2,000
3Q2014
1,848
(1,530)
318
(163)
156
0.0
15.4
(3.9)
0.0
167
(21.9)
(5.2)
140
140
203
30%
2,500
2Q2014
4Q2015
1Q2014
3Q2015
4Q2013
Revenue
Cost of Goods Sold
ross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
Revenue Trend
2Q2015
3Q2013
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2014
1Q2015
Revenue Growth % (QoQ)
Asset Breakdown (2015)
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
1,520
462
963
2,065
1,808
1,222
667
8,707
1,578
478
937
1,590
1,802
1,319
615
8,319
1,709
462
1,208
1,134
1,943
1,320
394
8,169
1,718
491
1,208
1,133
2,017
1,370
394
8,330
1,724
522
1,208
1,185
2,016
1,369
394
8,417
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
434
1,605
2,055
939
1,414
2,116
144
8,707
74.7
1,667
1,974
944
1,395
2,132
132
8,319
130
1,703
1,888
1,019
1,170
2,132
129
8,169
130
1,767
1,909
1,019
1,170
2,204
132
8,330
130
1,766
1,909
1,019
1,170
2,289
134
8,417
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
37.3
692
65.5
119.0
134.5
0.8
1.4
0.8
CASH
CASH
20.5
2.3
94.8
571
70.9
118.2
130.4
0.8
1.4
0.8
CASH
CASH
22.0
2.3
66.4
(13.7)
76.0
126.4
140.5
0.8
1.3
0.7
0.0
0.0
23.8
2.3
104
(15.5)
74.6
125.7
143.5
0.8
1.3
0.7
0.0
0.0
17.4
2.3
103
36.7
76.1
128.2
146.3
0.8
1.3
0.7
CASH
CASH
17.4
2.4
Debtors 20.7%
Net Fixed
Assets 26.8%
Assocs'/JVs 7.2%
Inventory 30.4%
Bank, Cash
and Liquid
Assets 14.9%
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 13
Company Focus
ST Engineering
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Capital Expenditure
2013A
2014A
2015A
2016F
2017F
730
142
(110)
(31.1)
154
44.8
930
(282)
70.8
(19.3)
39.6
(67.1)
(258)
(521)
28.2
52.2
(30.9)
(472)
17.7
218
25.0
20.9
651
171
(133)
(57.2)
(72.2)
65.3
624
(224)
79.0
5.67
35.0
(53.4)
(157)
(499)
(394)
10.7
(43.8)
(926)
(0.3)
(459)
22.3
12.8
630
187
(111)
(58.3)
(227)
44.6
465
(273)
(264)
0.27
51.4
7.98
(477)
(498)
109
(75.9)
(55.1)
(520)
12.6
(519)
22.3
6.20
651
191
(111)
(59.5)
(37.7)
0.0
633
(200)
0.0
(5.0)
35.0
0.0
(170)
(465)
0.0
0.0
0.0
(465)
0.0
(1.8)
21.6
14.0
667
194
(113)
(60.7)
0.61
0.0
687
(200)
0.0
(5.0)
35.0
0.0
(170)
(465)
0.0
0.0
0.0
(465)
0.0
52.2
22.1
15.7
S$m
300.0
250.0
200.0
150.0
100.0
50.0
0.0
2013A
2014A
2015A
2016F
2017F
Capital Expenditure (-)
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 14
Company Focus
ST Engineering
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte
Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document
may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard
to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of
addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal
or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of
profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This
document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it
may not contain all material information concerning the company (or companies) referred to in this report.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a)
(b)
such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction
in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 8 Apr 2016, the
analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended
in this report (“interest” includes direct or indirect ownership of securities).
ASIAN INSIGHTS
VICKERS SECURITIES
Page 15
Company Focus
ST Engineering
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in ST
Engineering recommended in this report as of 29 Feb 2016
2.
DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3.
Compensation for investment banking services:
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
RESTRICTIONS ON DISTRIBUTION
General
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
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This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”),
both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act
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Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended
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ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this
report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that
ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and
associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of
them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to
perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have
received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other
services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
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This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the
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Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons
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or in connection with the report.
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This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only
intended for institutional clients only and no other person may act upon it.
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the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is
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This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch)
rd
having its office at PO Box 506538, 3 Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC),
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research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon
it.
ASIAN INSIGHTS
VICKERS SECURITIES
Page 16
Company Focus
ST Engineering
United States
This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on
this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company,
public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional
Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may
authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should
contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
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DBS Bank Ltd
12 Marina Boulevard, Marina Bay Financial Centre Tower 3
Singapore 018982
Tel. 65-6878 8888
Company Regn. No. 196800306E
ASIAN INSIGHTS
VICKERS SECURITIES
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