STEng – Kim Eng
• With the US dollar at an all‐time low, we reiterate that a weak greenback is negative for ST Engineering. The recovery of the aerospace market has also been relatively muted. However, ST Engineering’s (STE) dividend yield is still attractive at 3.9%. Maintain HOLD and target price of $3.15.
• The US dollar has slid by 6% against the Singapore dollar over the past three months, weakening to an all‐time low of S$1.317. We note that the majority of STE’s commercial contracts are in US dollars, while a significant cost base is in Singapore dollars. STE had previously guided that every one cent decline in the exchange rate would translate to a S$1.3m slide in earnings.
• Furthermore, we continue to expect the aerospace market to lag in its recovery. Typically, the first positive impact on the MRO industry will come to line maintenance and eventually to heavy maintenance, which ST Aerospace is focused on. While we had anticipated a gradual pickup in this division, ongoing concerns over the US economic recovery and a lack of new orders suggest that this business will take longer to get back up to speed.
• STE’s last reported orderbook at 2Q10 was $11.3b, providing a baseload for the next three years. The company expects to convert about $2.2b in 2H10, which reinforces our expectation of 4.6% revenue growth for the full year. However, we may see a gradual dwindling of its orderbook for the reasons stated above, unless there is a pickup in overall business. Its recent contract to procure trainer aircraft and ground solutions to the Republic of Singapore Air Force for $543m is expected to have thinner margins due to the high equipment content.
Action & Recommendation
Our FY10 earnings forecast stands at $476.1m, which is slightly below consensus but still in line with management’s guidance. We are leaving our forecast unchanged, as the forex decline should be capped at around $10‐15m for now. Our forecast also implies healthy earnings growth of 7% and a dividend yield of 3.9%. STE’s stock price has held steady over the past few months, but at 21x FY10F earnings, we believe the stock is fully valued. Maintain HOLD.