STEng – OCBC

Modest growth ahead

Low teens growth. Singapore Technologies Engineering (STE) posted 4Q07 results with turnover and net profit rising tepidly to S$1.29b (+2.8% YoY) and S$141m (+7% YoY), respectively. On full year basis, revenue crossed the S$5b (+12.6% YoY) mark for the first time while bottomline grew 13% YoY to S$503.5m. The measured performance was partly due to muted investment gains and lower contribution from associates and JVs. STE also declared a final dividend of 14.88 cents, bringing total payout to 16.88 cents for FY07.

Starting engine overhaul. STE recently broke into the engine overhaul space with STATCO, a 80-20 JV with the Xiamen Aviation Industry Co. STE’s 80% stake gives it management control over the S$78m facility. STATCO will start maintaining some models of the CFM-56 engines that have a large installed base among Chinese Airlines. Overall, we anticipate the Aero division to continue to be the diadem of the group and forecast a robust 15% YoY revenue growth on the back of strong MRO trends.

Draggy SOE project. BT revealed that the S$1.5b SOE project to outsource the front end IT needs of the entire public sector met obstacles with the One Team consortium comprising NCS and IBM. We view this positively as it may swing the favour to the STE’s consortium. For FY08, we estimate revenue growth of 11% for STE’s Electronics division as it adds pursuit of government jobs on top of its commercial endeavours. We have not factored in this project win but expect that winning this SOE contract will be the earnings and share price catalysts.

Foggy roads and seas. Despite a better than expected 23% YoY growth in revenue for the marine sector, the expiry of major contracts without order book replenishment in sight will cause this division to be lacklustre. Land systems will continue to grow, albeit at a slower pace, and with lumpy contributions primarily from defence jobs.

Get defensive. We have tweaked our FY08/09 figures to cater to management’s guidance. Backed by S$9.5b in order book and a strong dividend yield of 5% for FY08, we expect STE to give a modest performance despite the turbulent market conditions. However, our fair value is lowered to S$3.92 based on the same 21x FY08 EPS due to growth moderation. As such, we downgrade to a HOLD. Securing big short term contracts like the SOE may trigger a re-rating.

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