STEng – DBS

Secured $128m shipbuilding order

Story: ST Marine announced that it has secured a contract to build and outfit a Diving Support Vessel for a foreign customer. Construction will start in Janaury 2009, delivery scheduled for mid 2010. The 107m vessel will support the client’s diving operations in the subsea sector for the oil and gas industry.

Point: This contract is not expected to have any significant impact on earnings, which accounts for only 1.4% of the group’s order book of S$9.2bn. ST Marine accounts for 17% of group sales and 15% of group PBT. In 1Q08, the Marine sector saw a 10% dip in PBT as the frigate contract is near completion and demand for shipbuilding activities reduced in the US. We expect ST Marine to post a 10% drop in PBT in 2008, this unit has lagged behind Singapore shipyards in securing shipbuilding and offshore contracts.

Relevance: The stock declined 15% to a low of S$2.49 after our downgrade to Fully Valued due to a) exposure to the ailing US aviation industry – major US airlines are reportedly cutting capacity by 10% to 18% b) exposure to the weak US economy (via Aerospace, Marine and iDirect) which accounts for 32%of group sales and c) weakening US$. Every 1% drop in the US$ will cause sales to decline by S$13m and affect PBT by S$1.6m. With the stock price just 6% from our target price of S$2.80(pegged to 15x on FY09 earnings), and the stock supported by dividend yield of 6.9%, we upgrade the stock to HOLD from FULLY VALUED. We prefer SIA Engineering (BUY, TP$4.49), which has a captive earnings base (70% of sales from SIA), and its earnings primarily from the Asian Aerospace industry. SIA Engineering is trading at 13.8x(FY08F) and 12.7x(FY09F), dividend yield of 5.6% and the stock is currently trading cum final dividend of 16cts(net yield of4.5%) – ex-date on 22 July 2008.

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