STEng – Phillip

FY10 above our expectations; Strongest quarter since recession

Revenue increased by 7.9% to S$5.98bn, PATMI increased 10.6% to S$491mn

Above our expectations as STE reports the strongest quarterly post-recession results

Top line growth across all business segments except Aerospace

Strong order book of S$11.5bn; Positive guidance for 2011

Maintain Buy recommendation with revised target price of S$3.80

FY10 results discussion. The result for STE was above our expectations. Revenue growth of 7.9% would have been c.S$30mn higher if adjusted to account for unfavorable forex (weakening of the € and US$). There is a significant change to the depreciation policy for the Group that contributed to a 9.8% increase in Gross Profit. Consequently, PATMI surged 10.6% to S$491mn. Dividends of 11.55cents (Final: 4.00+ Special: 7.55) will be proposed by the management.

Management Guidance. STE typically provides guidance for up to 12months in advance. The company expects to deliver S$3.7bn of their S$11.5bn order book in FY11 and guidance provided demonstrated management optimism for FY11. For the Aerospace sector, revenue is expected to be comparable to that of FY10, while PBT is expected to be higher. This guidance is fairly conservative in our view as we expect stronger growth in the Aerospace business, following strong capacity growth in the aviation industry. Part of the reason for this conservative guidance is due to a significant depreciation of the US$ over the past year. As majority of the aviation contracts are denominated in US$, a further weakening of the US$ would result in translational forex loss when converted into S$. For the rest of the business segments, management expects higher revenue and PBT as compared to FY10.

Risks. Further weakening of US$ & € against S$; Slow down in capacity added by commercial customers; Rise in interest rates could reduce attractiveness of STE’s dividend yield; Greater risk appetite by investors could reduce demand for low beta stocks.

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