STEng – OCBC

Improving sequentially

Improved quarter. Singapore Technologies Engineering’s (STE) 2Q09 topline grew to S$1.41b (+8% YoY, +7% QoQ) while PATMI was S$108.7m (-9% YoY, +28% QoQ). Sequentially, STE’s improved performance came from all its businesses except for Land Systems (lower forex gains, lower gross margin due to product mix). STE continues to iterate its guidance for a “comparable” turnover and PBT for this year. STE declared interim dividends of 3 S cents.

 Aero division to perform in 2H09. One MD-11 PTF and four B757 Passenger-to-Freighter (PTF) were converted this quarter giving a positive QoQ uptick in the Aero Division’s performance. Management indicated that the 757 PTF program will now be completely accretive (vs loss making learning phase in last few quarters) and will be delivering another seven conversions in 2H09. STE is confident that its geographical spread, diversified business segments and broad customer base will help sustain its topline. New programs that have been initiated a few years back (PTF and CFM engine) will be coming online to provide volume and a stable base load.

 Encouraging orderbook. STE maintained its orderbook at S$10.7b where it recognised about S$800m in its 2Q revenue while replenishing about S$500m of the orderbook through small contracts. S$2.06b will be delivered over the next two quarters. STE’s geographic and business diversification showed with contracts secured by all its divisions for work in various countries. China’s infrastructure spending will help to directly boost performance from its speciality vehicle business in the mainland.

 2H09 must perform. While making marginal upward progress, STE’s share price continues to trade in a tight range without large contract wins that typically served as share price catalysts. The first tranche of US$500m raised through its Medium Term Note program has not been slated for specific use despite market expectations of M&As. Should an acquisition occur, we feel it would not be significantly earnings accretive companies but smaller “bolt-on” companies to contribute technology platforms or distribution networks to the group. We are retaining our estimates and fair value of S$2.46 based on a blended 16x FY09/10F EPS. With limited share price upside along with a challenging 2H09 to navigate, we are maintaining our HOLD rating.

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