STEng – Kim Eng

ST Engineering – FY09 Results

Previous Day Closing price: $3.19

Recommendation: HOLD (maintained)

Target price: $3.15 (maintained) 

ST Engineering’s FY09 results were in line with expectations, with net profit at S$443.9m. Earnings declined 6% y-o-y on flat revenue. STE performed well despite a challenging business environment, but has reduced its dividend payout from its usual 100% of earnings to 90%, for the sake of financial prudence. We are maintaining STE as a Hold as the stock looks fully priced. Our target price is S$3.15, or 19x FY10 earnings forecast. 

Sequential improvement trend maintained

STE’s 4Q09 continued its quarterly trend of steady earnings improvement off its low in 1Q09. The aerospace business was expectedly weak, where its US operations in particular have been impacted by the weak commercial MRO market. It continues to perform on its orderbook-based revenue, primarily conversions, which limited the division’s y-o-y earnings decline to just 16%. 

Other businesses taking up the slack

As for its other businesses, Electronics continues to be the star performer, having raised its revenue by 20% and PBT by 23%, with earnings coming from across all sub-groups. Land systems improved earnings despite lower turnover due to a better product mix, while Marine grew its turnover and earnings mainly from shipbuilding contracts. 

Dividend payout reduced for prudence, likely a one-off

STE reduced FY09 dividend payout to 90% of earnings from its usual 100%. STE will pay a final dividend of 10.28cts per share, and with the interim of 3.00cts per share, provides a yield of 4.2%. Management says it wants to maintain a more balanced debt to capital ratio, especially with the issue of its US$500m bond in July. As a policy, however, STE will still refrain from keeping too much cash in its books, and we expect the full payout ratio to be restored for FY10. 

Maintain HOLD, prospects fully priced in

Despite official guidance for flat earnings in FY10, management sounded relatively sanguine for a pick-up in business conditions in FY10, particularly in the Aerospace sector. We are taking a more optimistic stance and forecasting net profit growth of 12% to S$498.7m in FY10. Despite this, STE is already trading at 19.3x FY10 earnings, which is fair value versus the STI’s 15x. We maintain Hold with target price of S$3.15.

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