STEng – CIMB

Contract win for VT Miltope

VT Miltope wins US$500m contract

Maintain Underperform; upgrade target price from S$2.38 to S$2.78. ST Engineering’s land system subsidiary, VT Miltope, in the US announced that it has secured a 5-year Indefinite Delivery Indefinite Quantity contract worth US$500m to supply rugged laptops, test equipment and instruments to the US army. We raise our earnings estimates by 1% for FY10-11 to incorporate the contract. Our revised target price is still based on blended valuation as we upgrade our earnings, roll forward to end-CY10 and adopt a higher P/E of 17x (previously 11x on SARS valuation) in view of a recovery of the global economy. However, we continue to see limited catalysts for a re-rating of the stock given a muted outlook for the global aviation sector.

VT Miltope to perform 70% of the US$500m contract. The 5-year contract was awarded by the Test, Measurement and Diagnostic Equipment Product Directorate of the US Army. The US Army has the flexibility to take delivery of the AT Platform Automatic Test Systems Maintenance Support Device – Version 3 (MSD-V3) comprising rugged laptops, test equipment and instruments over five years from 2010 to 2014. Some 70% of the contract will be carried out by VT Miltope and 30% by its subcontractor, Science and Engineering Services Inc. We estimate VT Miltope’s share of the contract at US$350m (S$495m).

Estimated S$100m of annual revenue. Assuming that the programme is evenly rolled out over five years, we estimate S$100m of revenue or S$4m of net profit for the group each year. Our earnings estimates have been upgraded by 1% for FY10-11 accordingly.

Valuation and recommendation

Maintain Underperform. ST Engineering is trading at 17x CY10 and 16x CY11 P/Es, close to its 5-year historical average (17x). Although it offers decent yields of 5-6%, we continue to see limited stock catalysts in the absence of a strong pick-up in the aviation sector in the short term. However, we upgrade our target price from S$2.38 to S$2.78 as we upgrade our earnings, roll forward to end-CY10 and apply a higher P/E
of 17x (previously 11x on SARS valuation) in our blended valuation.

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