STEng – CIMB

Protect your portfolio!

Protect your portfolio! This should be the best time to buy STE for its defensive quality in the face of volatile markets. Indeed, its share price has outperformed the market by 11% in the last three months. With little room for sharp depreciation in the US$, we are hanging on to hopes of earnings surprises, which we believe can offer re-rating catalysts. Consensus expects the US$/S$ to hover at S$1.18-1.20 into 2012, which would have a negligible (1% or S$6m) impact on STE’s PBT in the worst case. In fact, we believe current valuations of 15x CY12 P/E (below its average trading band of 16x during the previous crisis) have priced in fears of US$ deterioration and macro uncertainties. No change to our earnings estimates, target price of S$3.61 (still based on blended P/E, DCF and dividend yields).

Zero order-book risk. Unlike its conglomerate peers with substantial exposure to the offshore & marine space, STE’s order book (S$10.8bn) is secure with almost zero risk of cancellations as 40-50% of its contracts are defence-related. Commercial contracts are mostly from long-term customers with strong financials including Fedex, American Airlines and Japanese airlines. STE has also been chalking up orders from all segments worth about S$1.5bn YTD.

MRO recovery intact. More than 1,500 narrow-body aircraft (delivered in 2009-2010) could be scheduled for “C” checks (18-24-month cycle) starting 2H11, affirming our view that the MRO recovery is on track.

High yields and cash-rich. STE offers a safe refuge with its fairly attractive dividend yields of about 6%, only slightly lower than the 7% from telcos and REITs. The yield is also backed by a solid balance sheet as it continues to generate net cash (S$220m as of 1H11). It is also one of two companies in Singapore with an AAA rating (the other being Temasek) from Moody’s.

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