STEng – DBS

Back on the growth track

• Recent MRO contract wins in US point to aviation market recovery, as well as growing 3rd party
outsourcing
• Expect defence and infrastructure contract wins on the back of sustained government spending
• War chest of S$1.6bn points to potential acquisitions; 100% dividend payout likely again
• Maintain BUY, TP revised up to S$3.80

MRO outsourcing set to recover in the US. In Dec’09, STE announced a couple of significant MRO contract wins in the US worth about US$230m (including options), after a long dry spell of US-based contracts in the early part of FY09. We believe this could be the start of a recovery in the US aviation market and we could see more airlines willing to outsource their non-core functions to 3rd party MROs like STE. The ongoing recovery in the air cargo market should also fuel the demand for Passenger-to-Freighter (“PTF”) conversions, where STE has an established presence.

Government contracts will underpin revenue growth. Even after 2009’s impressive stimulus package, the Singapore government has indicated that spending will be stepped up in the 2010 budget – due to be announced just a month from now. STE is a key beneficiary of Government spending on defence, transport and infrastructure and we expect strong order flows to support revenue growth in 2010-11.

Maintain BUY, PE premium to STI not normalised yet. In line with the expected recovery, we revise up our EPS estimates slightly by 1-4% over FY09-11 and raise our TP to S$3.80 – pegged to 23x FY10 earnings. We expect STE to sustain its 100% dividend payout when it announces FY09 results next month, translating to a yield of 5.0% for FY10 and 5.4% in FY11. With over S$1.6b in gross cash following the US$500m bond issue in 2H-FY09, acquisitions are on the cards as well, which will spur its growth to a higher platform.

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