STEng – DBS

Look beyond the yield cut 

4Q09 earnings in line; excluding S$9m tax writeback, net profit was S$120.7m, almost flat q-o-q

FY09 dividend payout cut to 90% from 100% earlier; final payout of 10.3Scts in May

Savings add on to war chest in excess of S$1.7b; points to potential M&A activity

Maintain BUY, TP reduced to S$3.60; any short term dips will present good entry points 

Mixed performance 4Q09 revenue up 9% q-o-q, contributed by Land Systems (+30%, higher Warthog and Terrex deliveries) and Electronics (+25%). However, major contributor Aerospace dragged down earnings with lower revenue and profits (PBT margin of 13% vs. 15% in 3Q09) but it was more of a timing issue and the PTF programme remains profitable. Going forward, we reduce our FY10-11 EPS estimates by about 2.5%, as we moderate our margin and sales mix assumptions across different sectors. To note, FY10 numbers will have lower benefit from Job Credits, which contributed about S$39m of savings in FY09. 

Orderbook, balance sheet to underpin growth. Order backlog at the end of FY09 stood at S$10.3b, excluding a US$500m Indefinite Delivery Indefinite Quantity contract signed with the US Army last year. Thus, we remain confident of about 8% EPS growth over the next 2 years, driven by higher revenue and margins. The kicker should come from acquisitions funded by the US$500m MTN issue. The Group currently boasts of S$315m net cash, up from S$172m at end-FY08, as better working capital management led to higher operating cash flows in FY09. 

Look beyond the negatives of dividend cut. While the cut in payout policy may have negative short-term impact, we think STE – with its defensive earnings base, and with the potential of organic as well as inorganic growth– should outperform the market in coming months, amidst the growing macro uncertainties. Thus, we maintain our BUY call on the stock, albeit at a reduced TP of S$3.60, as we change our valuation methodology to reflect the effect of modified dividend expectations.

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