STEng – DMG

Cautiously optimistic despite turbulence

Better than expected if certain items were excluded. In the year to Dec 08, ST Engineering’s (STE) net profit came off by 5.9% to S$473.6m on the back of a 5.8% increase in revenue to S$5,344.5m. Full year net profit had fallen short of our estimates at S$514.2m, although we note that it would have came in at S$529m and beaten our expectations should the S$25.9m impairment of investments and the S$29.5m allowance for doubtful debts be excluded.

Still expecting comparable earnings in FY09 despite the current economic turmoil. With its order book at a record S$10.6b (of which S$3.6b would be fulfilled in FY09), management highlighted that its mixture of commercial and government contracts would serve as a good buffer in this current downturn, especially so given that the various countries are implementing their respective stimulus packages to make up for the shortfall in private sector spending.

Furthermore, STE’s extensive geographical reach would also ensure that the risks pertaining to protectionism issues – as the various governments attempt to restrict spending to their own countries – are kept low. Additionally, we also note that STE’s exposure to new markets, which have been less affected by the current downturn, have also been steadily increasing.

Earnings and target price revision. Given the tepid economic outlook, we have reduced our FY09 earnings by 18% to S$465.2m (-1.8% YoY). We have also introduced FY10 earnings, which we estimate to grow 10.9% to S$516.0m. At S$2.06, STE is trading at 13.3x FY09 and 12.0x FY10 P/E, which is at the lower end of the trading band. Assuming that the Group keeps to its 100% payout, dividend yield remains attractive at 7.5 – 8.3% for the next two years. Based on our DDM, we attain a price target of S$2.47 (previously S$2.83), suggesting a 19.8% upside from current levels. The new target price implies a prospective P/E of 15.9x, lower than the 5–yr average of ~20x. Maintain BUY.

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