STEng – DBS

Dividend concerns unfounded

Excluding one-off impairment charge in 4Q08, FY08 net profit of S$473.6m (down 6%) was in line with our expectations. Allaying market concerns, ST Engineering declared a 100% dividend payout, amounting to 15.8cts per share for FY08. While a record orderbook of S$10.6b secures 60-70% of FY09 revenues, headwinds in aerospace sector will continue to be a drag on earnings. We lower our EPS forecasts for FY09 and FY10 by about 8% each. However, gross cash level above S$1b and strong free cash flow generation of close to S$500m per year should help STE sustain its dividend payout record, translating to a dividend yield of 7.5% Maintain BUY, TP reduced to S$2.50.

4Q08 earnings hit by one-off items. 4Q08 PBT came in at S$89m (down 38% y-o-y), largely due to the impairment of three equity investments worth S$23m (two in Electronics, one in Land Systems) and a S$31.7m allowance for doubtful debts related to the bankruptcy of aerospace customers, Sterling and EAMS. Net profit of S$102m was boosted by a tax credit of S$18m.

Weaker performance in key sectors. Apart from provisions for doubtful debt, aerospace segment PBT of S$272m (down 20% y-o-y) was hit by high depreciation charges on new facilities, prototyping costs for PTF conversions and a weak US$ impact of S$19m. Marine revenues and margins were weak as major revenues from the frigate program were booked in FY07 and losses were recognised on a contract signed last year.

Dividend yield secured by record orderbook. Risk to the orderbook is minimal as defence and government related projects make up more than 50%. The Group is also expected to be a key beneficiary of the increased government spending on infrastructure projects worldwide. Net cash of close to S$200m and strong operational cashflows indicate dividend sustainability and a yield of 7.5% at current trough valuations. Maintain BUY, at a reduced TP of S$2.50.

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