STEng – DB

Successes in military, new fees from Boeing a positive

Successes in military; about S$1.2bn unannounced orders won in 1Q09
STE has seen strong order inflows from its military business and we expect this strength to continue. Sensitive in nature, military orders by the Singapore Armed Forces are often not disclosed but the difference between FY08 and 1Q09 order books (considering 1Q09 recognized total) suggests new orders worth c. S$1.2bn were won in 1Q09, the bulk of which we think are liekly military related. Maintain Buy on what we see as attractive valuation.

Capable, well-regarded military products
STE manufactures products that are well regarded as indicated by the successful UK Bronco sales, continued orders for its 40mm ammunition, and the group previously being the front-runner for potential Indian howitzer order (now put on hold pending an investigation of a retired ordnance official by the Indian authorities). According to STE, its participation followed India’s processes.

Boeing’s new fees on unlicensed PTF players a positive
Effective on or after 15 April 2009, for operators of aircraft converted by non- Boeing licensed converters, a fee of US$150-250k/year/plane will be charged by Boeing. ST Aerospace, being a Boeing licensed partner, will fall under a special category with lower fees paid by operators. This move is positive in our view as it effectively raises the price of PTF work done by non-licensed players and may lead to future potential business flowing to licensed parties such as ST Aero.

Maintain Buy; record orders, net cash, high ROE/dividends; risks
STE is sitting on a record order book of about S$11bn (as at 1Q09), providing healthy long-term visibility. The group is in a net cash position which places it strongly for any potential M&A activities. Our DDM-based target price of S$3.00 is based on a 7.4% cost of equity, (2.6% RFR and 4.8% ERP). Downside risks relate to project execution, greater-than-expected US$ depreciation, and worse-than expected aircraft grounding.

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