STEng – UOBKH
Slower Growth At Aerospace Division
Uncertainties ahead. Management has categorised 2008 as a year of uncertainties in the latest annual report, citing poor economic conditions in the US as a cause. The aerospace division, which accounts for half of the Group’s pre-tax earnings, should see top-line compression as airlines rationalise costs in the wake of steep fuel cost hikes. We are also concerned with the rise in impaired receivables as shown in the latest annual report and have allowed for further write-downs in 2008.
CAGR of 6.8% and projected 95% payout. Despite the potential headwinds at ST Aerospace, we like ST Engineering (STE) for its diversified business units and also its growing track record of expanding into new markets. All the divisions, except for the marine division, are expected to show modest growth over the next two years. Overall, we are looking for three-year CAGR of 6.8% for the next 3 years, compared to the 15% achieved during the previous three years. Dividend payout is projected at 95% for the next three years.
Downgrade to HOLD. We have downgraded our recommendation from BUY to HOLD given the difficult operating environment of the aerospace division. Our fair value is pegged at $3.62 based on DCF valuation. Key attraction is STE’s ability to offer yield of 5% in lieu of low capex requirements. We suggest an entry price of $3.30, allowing for a 10% upside to our fair value.