STEng – DBSV

Big boost to orderbook

S$880m defence-related contract from new overseas Navy customer should renew faith in STE’s capabilities, reputation and demonstrate its resilient business model

Recovery in the US economy will further benefit STE; US$ weakness is unlikely to be a concern in FY12

Dividend yield remains healthy at 5.3%, upgrade to BUY with revised TP of S$3.40

Biggest contract win for Marine in recent years. ST Engineering’s shipbuilding and shiprepair arm ST Marine has won a EUR534.8m (S$880m) contract to design and build 4 patrol vessels (PVs) and provide associated logistic support for the Royal Navy of Oman. ST Marine will build four 75-metre PVs based on its proprietary Fearless Class of PVs. The project will commence immediately, with deliveries expected between 2Q 2015 and 3Q 2016.

Further strengthen track record in securing overseas customers for its defence sales, as the Sultanate of Oman is a new customer for STE. This is ST Marine’s second significant contract win for the year, following an order for 2 AHTS vessels from Swire Pacific Offshore in February, and brings total order wins YTD in 2012 to S$1.3bn. With S$3.2bn worth of new contracts secured in FY11, outstanding orderbook could reach a record level exceeding US$12.5bn, providing healthy earnings visibility in FY12/13F.

Upgrade to BUY. This contract win should help refocus investors’ attention on the resilient nature of STE’s business and away from the media hype about proceedings against ST Kinetics in India, which is immaterial to earnings and at worst, an opportunity loss. We revise up our FY12/13 earnings estimates by 1-2%. With the recent acquisition of NeraTel, STE’s growth trajectory looks set to be on track, especially as concerns over US$ fades and the US economy – to which STE has significant exposure – is showing signs of recovery. As such, we upgrade the stock to BUY with a revised TP of S$3.40, given the better earnings outlook, strong balance sheet and healthy dividend yield of over 5%.

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