ST Engineering

OCBC on 16 Apr 2012

ST Engineering (STE) announced that its aerospace arm has secured a total of ~$540m worth of contracts in 1Q12. Together with its recent announcements, STE has announced a total of ~S$1.5b worth of new orders in 1Q12, including ~S$100m of new contracts secured by its electronics segment and a ~S$880m contract to build four patrol vessels for the Royal Navy of Oman. With the contract wins in 1Q12, STE’s robust S$12.3b order book at end-FY11 has likely grown further by end-1Q12. Also, the contract with the Royal Navy of Oman should restore investors’ confidence in STE’s defence sales. STE’s recent strong flow of new orders should improve sentiments on its shares. Thus, we maintain our BUY rating on STE with a new fair value of S$3.50/share, from S$3.32/share previously.

ST Aerospace won $540m of new contracts
ST Engineering (STE) announced that its aerospace arm, ST Aerospace, has secured a total of ~$540m worth of contracts in 1Q12. STE added that these contracts are to be carried out at its maintenance, repair and overhaul (MRO) locations around the world. Also included in the new contacts are passenger-to-freighter conversions of 15 Boeing 757-200 aircraft.

S$1.5b of new orders in 1Q12
Together with its recent announcements, STE has announced a total of ~S$1.5b worth of new orders in 1Q12. STE earlier reported that in 1Q12, its electronics segment won a total of ~S$100m of new contracts while its marine arm was awarded a contract worth €534.8m (~S$880m) to build four patrol vessels for the Royal Navy of Oman. With the strong order flow in 1Q12, STE’s robust S$12.3b order book at the end of FY11 has likely grown further by end-1Q12.

Restores investors’ confidence in defence sales
The ~S$880m contract to build patrol vessels for the Royal Navy of Oman, in particular, should restore investors’ confidence in STE’s defence sales. This comes after news reports of the Indian Ministry of Defence blacklisting six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. Furthermore, STE has vigorously maintained its innocence of any wrongdoing resulting in this disbarment.

Maintain BUY with higher fair value of $3.50
STE’s recent strong flow of new orders should improve sentiments on its shares. Thus, we assigned a higher P/E multiple of 20x, from 19x previously, to its EPS over the next four quarters and derived a new fair value of S$3.50/share, from S$3.32/share previously. We maintain our BUY rating on STE.