ST Engineering

DBS Group Research on 18 June 2013

ENVIABLE track record. We recently met up with 35 fund managers on a roadshow in the US with STE's management team.

Investors are generally impressed with the group's track record over the past 10 years, chalking up revenue compounded annual growth rate (CAGR) of 9.3 per cent, net profit CAGR of 5.7 per cent and economic value added (EVA) of 8.7 per cent.

Current shareholders have done well to enjoy the ride on ST Engineering's sterling share price performance over the past 12 months, the stock generating total return of 32 per cent (including dividend yield) notwithstanding the recent pullback.

Strategic growth drivers in place. Key discussion topics during the roadshow revolved around the group's strategy for growth and possible changes in revenue mix in the next five years.

Near-term growth will come from acquisitions in Aerospace (PTF conversions in Europe), new hangar facilities in Guangzhou and an engine workshop in Xiamen and expansion into the ship-repair business in the US.

Armed with a net cash chest of more than $500 million, the group is well positioned to source for M&A for longer-term growth. Management's key concern would be to negotiate an environment of rising cost pressure in Singapore due to the curbs on foreign labour, to ensure the group's competitiveness in the global arena.

Maintain "buy", TP of $4.80. STE has no exposure to a potentially rising interest rate environment globally, and hence remains our preferred pick, offering strong earnings visibility from its record order book of $13 billion, steady earnings growth of 6 per cent and dividend yield of 4.6 per cent. The stock is a proxy to recovery in the US economy with 27 per cent of sales from the US.

Appreciation of the US dollar, if sustained, will provide earnings upside. Catalyst for stock performance will come from sustained order win momentum, going forward.

BUY