STEng – CS

Outlook improving but valuations still demanding

• STE announced on that it has been awarded a ten-year engine maintenance contract by Jet Airways.

• The contract is worth US$750 mn (S$1.0 bn) and will commence immediately. The company does not expect this contract to have any material earnings impact this financial year.

• YTD, STE has secured new contracts worth S$1.8 bn, versus S$3.7bn of the order book (of S$10.3 bn as of December 2009) expected to be delivered in 2010.

• We adjust our revenue assumptions mainly to reflect a more favourable demand outlook. Overall, we raise our FY10E and FY11E net earnings by 2% and 9%, respectively. However, we cut our dividend forecasts to reflect a lower payout ratio. We also raise our DCF-based target price from S$2.37 to S$2.68 (implied P/E of 17x).

• Despite the stock's underperformance and improved outlook, STE remains expensive, in our view. At S$3.19, the stock is trading at a 2010E P/E of 20x. Our target price of S$2.68 represents 16% potential downside from here. We maintain our UNDERPERFORM rating.

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