STEng & SPH – OCBC

Sticking with Singapore’s Stalwarts

Continued choppy markets. With the see-saw vacillation of the market expected over the next 1-3 quarters, as a result of the domino effect from the subprime fallout, there is a de-rating of the market due to slowing growth. The increased risk premium will mean investors are less willing to pay higher multiples for uncertain growth stories. Investors are shifting into defensive stocks with high dividends, high earnings visibility and cash flow stability.

STE has underlying stability. Singapore Technologies Engineering (STE) posted a good set of results as revenue crossed the S$5b (+12.6% YoY) mark for the first time, while bottomline grew 13% YoY to S$503.5m. STE also declared a final dividend of 14.88 cents, bringing total payout to 16.88 cents for FY07. STE has a strong order book of S$9.5b, of which S$3.5b will be recognised in 2008, thus providing a back bone for earnings. We think that the USD-SGD rate concern is overblown as management estimates »S$1.5m loss in PBT for every 1 US cent fall, insignificant in the light of >S$500m net profit.

SPH has insulated monopoly. Despite slowing down, the Singapore economy continues to do well with the Ministry of Trade and Industry reporting a growth of 5.4% in 4Q07. A poll of economists projected Singapore to grow around 5.6% in 2008 despite the US slow down. Although limited to the local market, we expect SPH to ride its advantageous monopolistic grip in Singapore to turn in consistent net profits. We expect SPH’s largely local operations to continue to be relatively insulated from the slowing economies in the west.

Attractive price entry. STE has historically returned all of its net profits to shareholders, while SPH has historically paid out all of its recurring earnings from its print business. At current prices, STE (S$3.41) and SPH (S$4.60) have an attractive dividend yield of about 5.5% and 5.7%, respectively. While the STI has lost about 13.6% (average 3.4% dividend yield) since the start of 2008, STE’s drop in share price was less drastic at 10.8% and SPH remained a stalwart with a 2% rise.

BUY into stability. We upgrade our call to BUY for STE as valuations now look attractive (fair value: S$3.92) and maintain our BUY call for SPH (fair value: S$4.87).

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