STEng – OCBC

Right on track

Small but meaningful acquisition. Singapore Technologies Engineering Ltd (STE) announced on 20 Sep 2011 that its American subsidiary Vision Technologies Aerospace Inc. agreed to wholly acquire DRB Aviation Consultants, Inc. (DRB Aviation) for US$1.45m (~S$1.75m). Apart from strengthening STE’s cabin interior engineering capability, DRB Aviation is a Federal Aviation Administration (FAA – the American aviation authority) designee in issuing minor Supplementary Type Certificates (STCs) for avionics and interiors projects. While it is possible for STE to develop this FAA designation in-house, management reckons this acquisition is both faster and more cost effective. Alterations to an aircraft’s certified layout require an approved STC and STE used to outsource STC certification of its aviation cabin engineering projects. With this acquisition,

the STC certification process could be done within the STE Group.

S$68m contract win from MINDEF. STE announced on 13 Sep 2011 that its subsidiary ST Kinetics won a S$68m contract from the Singapore Ministry of Defence (MINDEF) to supply its new generation of Spider Light Strike Vehicles (Spider LSV). Delivery is expected to take place over 2013-14. While the contract value is small relative to the size of a conglomerate like STE, this contract win illustrates STE’s ability to continue developing new products.

CPIB investigations. STE announced on 12 Sep 2011, that Patrick Lee, the CFO of the holding company of the group’s American business interests, Vision Technologies Systems, Inc. (VT Systems), was arrested by Singapore’s Corrupt Practices Investigation Bureau (CPIB). Lee was not charged in court, subsequently released on bail and granted permission by the CPIB to leave Singapore. STE believes this is in relation to certain transactions that happened when Lee was the financial controller at ST Marine. Since then, Lee has taken a leave of absence while the CPIB’s investigations and STE’s internal inquiry continue. STE Group’s financial controller Raphael Chin has been appointed as acting CFO of VT Systems. Management believes this arrangement will not have any material impact on the operations of the STE Group.

Maintain BUY. Since our last report on 9 Sep 2011, the FTSE Straits Times Index has fallen 5.5% to 2,701 points. During the same time, STE displayed its defensive nature as its share price only fell slightly by 0.3%.. Given STE’s strong order book of S$10.8b, its 90% dividend payout ratio and that recent news developments do not have a material impact on STE’s resilient earnings, we retain our fair value estimate of S$3.37 per share. As the fair value still represents 14.6% upside to our fair value, we maintain our BUY call.

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