ST Engineering

Kim Eng on 13 Sept 2012

A shield against global worries. Recent contract wins have helped cement our view that STE remains one of the top defensive picks for investors concerned about global macro uncertainties. STE’s strong orderbook, helped in no small way by its defence contract capabilities, provides earnings visibility and supports an attractive forward dividend yield of 5-5.5% p.a. Our BUY call has worked out quite well since our upgrade in April, with a ~10% total return on investment. With a target price of SGD3.78 pegged to mid-cycle valuations of 19x FY2013 PER and the best yet to come, we maintain our BUY call.

FY2012 in the bag; FY2013 looking good. SGD179m in contracts recently announced by ST Marine reaffirms strong contract win momentum despite the tough economic conditions. This brings its total orderbook closer to SGD13b, of which ~SGD2.5b (40% of our FY2012 revenue forecast) is expected be booked in 2H2012. With 1H2012 revenue of SGD3.1b (50% of FY2012 forecast), we believe our FY2012 revenue forecasts are in the bag. As we expect the strong momentum to continue, FY2013 is also looking good.

Conservative margin assumption suggests upside to earnings. We have assumed a 9% net margin for our FY12-14 forecasts, but there may be upside potential as these are conservative assumptions that mirror operating conditions immediately after the Great Financial Crisis of 2008-09. STE’s earnings resilience comes from diverse businesses that help shield it from sector-specific shocks. Historically, they have given earnings a complementary mix of stability and profitability.

The cycle is still on STE’s side. We believe Aerospace and Marine still have upside in their respective cycles, as the aviation MRO industry is expected to benefit from the proliferation of airline capacity, and high oil prices are keeping activities in the offshore sector positive. For Electronics, government initiatives to enhance the local rail transport network are improving contract win visibility, while Kinetics will continue to be underpinned by steady defence-based contracts.