STEng – OCBC
Continuing to perform
Continuing to replenish its orderbook. STE Engineering (STE) has continued to perform according to our expectations. Since its 2Q10 results, we note that the group has been replenishing its orderbook via new contracts. Specifically, its electronics arm, ST Electronics, had been awarded a contract worth ~S$10.9m to provide SMART vehicle and asset tracking devices for the recovery of stolen vehicles and goods. More recently, it also won a contract worth ~S$29m to supply Automatic Meter Reading (AMR) radio transceivers for Arad Technologies’ AMR solutions. We see these developments positively as these clearly illustrate STE’s strong market position and its ability to deliver reliable and innovative solutions.
May gain from passenger and freight capacity additions. In the aerospace segment, we believe STE may potentially benefit from the return of capacity to the passenger and freight markets. According to the International Air Transport Association (IATA), passenger aircraft orders have surged at recent airshows and aircrafts have been taken from storage at a rate of 195 in 2Q and a further 84 in Jul. While few details were given about the capacity addition in the air freight market, we note that there has also been an additional 11.9% of capacity brought back in Jul (7.7% YTD). Being the world’s largest aircraft MRO service provider, we thus see potential for STE to gain from the return of passenger and freight capacity into the market, especially those coming out of storage.
Higher turnover and PBT expected in 2H10. As a note, STE had guided during its 2Q10 results that its sales and profit before tax (PBT) in 2H10 are likely to fare better than 1H10, lifted by positive contribution from its Electronics, Aerospace and Marine segments. Only the Land Systems segment is expected to post lower PBT in 2H10.
Upgrade to BUY. While STE cautioned that the aviation MRO demand is still lagging and may only see a recovery in 2H11, we believe that the group may get a boost from recent positive news and an earlier-than-expected recovery in the MRO market. As such, we raise our FY10-11 forecasts by 0.4-0.8% to factor in our more optimistic view. With just over a quarter to year end, we also roll our valuation to FY11. At 21x FY11F EPS, our fair value is in turn raised to S$3.66 (S$3.28 on 20x blended FY10/11F EPS previously). We upgrade STE to BUY as we now see a total expected return of 15%.