STEng – Phillip

Growing with resilience

Singapore Technologies Engineering Ltd (STE) is an established integrated engineering company with a strong position in defence and aerospace business. While maintaining a strong base in Asia, STE increased its exposure to global markets through organic growth and acquisitions over the years.

Strong dividend record. As the stock has a strong track record of high dividend payout, the dividend grew in line with the company growth at CAGR of 6.1% over the past 10 years. STE paid out all of its earnings for the year from 2003-2008. However, we believe that on the long run, maintaining a 100% payout ratio is not sustainable as the company needs to retain cash for further expansions.

Strategic partner of Singapore’s defence. STE has strong roots in Singapore’s defence ecosystem and its dominant position in the local defence industry enabled the company to anchor a base load of business.

Resilience of earnings. The four business segments of Aerospace, Marine, Electronics and Land systems provided diversity that enabled the company to stay profitable during the recent economic downturn.

Sustainable Growth. The top line of the company grew at a CAGR of 10.5%, while bottom line grew at a CAGR of 4.3% over the past 10 years. With the order book at an all time high of S$11.8bn (as of 31 March 10), we expect growth for the company to be sustainable.

Key drivers of growth:

• Being one of the largest MRO players in the world, recovery in aviation traffic would increase the flight hours clocked by aircrafts. With the increase in utilization, the demand for MRO services could rebound strongly.

• Increase in automation and networking requirement of infrastructures, such as railways, traffic, buildings and military systems would propel the growth of the electronics segment of the business.

• The Marine business in US has exhibited strong growth in recent years and we expect their growth to continue with the significant contracts won.

• Growth for the Land system segment would be fueled by contract wins with foreign militaries and commercial sales of specialty vehicles in emerging markets.

Key risks:

• Due to concerns over sovereign debt in Europe and US, scale back of Defence and Government expenditure could hinder global growth in the medium term, although we expect this to be mitigated by growth in Asia, to which revenues are skewed.

Valuation:

• We used a Free Cash Flow to Equity (FCFE) model (COE: 8.4%, Terminal growth rate: 3.5%) to arrive at a 12-monthly target price of S$3.64. After considering our projected dividend payout, total returns for the stock over the next 12 months would be 15.0%. We initiate with a BUY call.

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