STEng – DBS

Holding Fort

We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of
S$10b and 4) cash and cash equivalents of S$1b.

Robust orderbook of S$10b will drive revenues.
Contract wins have been stable across the Group’s subsidiaries in recent months, demonstrating the defensive nature of the Group’s diversified earnings stream. It is also in line with our expectation that public spending in defence, transport, and infrastructure projects will mainly drive revenue growth over the next two years.

US operations may recover faster than expected.
Even though major US airlines have pared capacity in FY08, jet fuel prices have corrected significantly and airline industry losses, going forward, will be lower than previously expected. Hence, the demand for 3rd-party MRO work may recover earlier than projected.

Upgrade to BUY, attractive dividend yield of 7%.
The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. As a result, the Group has been able to generate very high ROEs in the range of 30%, while still retaining cash and cash equivalents of approximately S$1b at the end of 3Q08. We believe this strong cash holding will present potential growth upside – in the form of good acquisitions at distressed valuations.

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