ST Engineering

DBS Group Research on 18 Feb 2013

RESULTS for Q4 2012 and FY2012 were in line with estimates. STE reported net profit of $576 million for FY2012, up 9 per cent y-o-y on the back of 6 per cent growth in revenue to $6.4 billion. Earnings were mainly driven by the Aerospace and Electronics segments, but all divisions showed improvement. Results would have been better if not for higher allowances for doubtful debts, impairment of goodwill and higher tax charges. Group profit-before-tax margin remained stable at 11 per cent. Aerospace margins improved to 15 per cent despite start-up losses at new projects.

STE finished the year with an order book of $12.1 billion, but this could be boosted by another $1.5 billion-$2 billion (our estimate) from the recently secured contract to build eight patrol vessels for the Singapore Navy. We conservatively expect earnings growth of about 6 per cent per annum in FY2013/14, but there is upside potential from the MRO division, where business has been picking up, especially in the US.

While the stock is currently trading at 20 times FY2013 PE, it is still below the +2 standard deviation level, unlike some of the other dividend yield names in the market. In terms of yield spreads, we are still not quite close to the previous peaks. With yield compression in vogue, we reckon there is room for further upside. Thus, we maintain our "buy" call on STE with a revised TP of $4.40, premised on higher valuation metrics, as justified above. With healthy earnings growth of about 6 per cent and yield of about 4.5 per cent, we believe the stock still presents one of the more compelling investment cases among the defensive, dividend yield names listed on the SGX.

BUY