STEng – Kim Eng

Event

While ST Engineering’s (STE) headline FY10 earnings of $491m were above our forecasts, this was actually slightly below our core expectations, as STE derived a gain through a change in its depreciation policy. Nevertheless, earnings were generally resilient. STE declared a final and special dividend totaling 11.55cts for a fullyear payout of 90% of earnings. FY11F PER stands at 17.1x, which is fairly valued in our opinion. We maintain our target price of $3.15 and HOLD recommendation.

Our View

• STE reviewed its depreciation policy for its property, plant and equipment during the quarter. Based on the recommendation of independent consultants, it broadly extended the useful life of its operating assets and buildings. This move effectively reduced FY10 depreciation by $39.5m.

• Combined with the interim dividend of 3cts, FY10’s fullyear dividend per share was 14.55cts. This amounts to a 90% payout ratio. Although we were optimistic that STE would resume its 100% payout, management has maintained this more prudent ratio as a buffer against future potential foreign exchange translation losses, which eroded FY10 earnings by around $11m.

• Management sees better PBT for all business segments in FY11. However, we are optimistic that the aerospace division may see an even stronger recovery, trickling down from improving operations in the US and global aviation market. STE’s total orderbook currently stands at $11.5b, versus $10.3b at end2009. It expects to convert about $3.7b of this in FY11.

Action & Recommendation

We raise our FY11 and FY12 forecasts by 4% and 6%, respectively, solely due to the change in its depreciation policy. Despite our HOLD rating, forward dividend yield of 5.3% is still attractive, and assumes a continuation of the 90% payout ratio.

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