STEng – Kim Eng

4 business pillars, 1 growth model

A mega contract in the bag. ST Engineering’s (STE) marine arm, ST Marine, has bagged its largest order in recent years – an S$880m contract to design and build four patrol vessels for the Royal Navy of Oman. This was welcome news, coming on the back of ST Kinetic’s recent blacklisting by India for its alleged involvement in a bribery scandal. It also confirms that STE’s reputation as a defence engineering specialist is untarnished.

Multi-pillar earnings growth model. ST Aerospace, STE’s largest revenue contributor, also reported significant contract wins in 1Q12 that amounted to S$550m. The increase in defence expenditure by the government and its push for a more efficient public transportation system should augur well for ST Electronics and ST Kinetics as well. Taken together, these factors would continue to drive STE’s growing orderbook, thereby providing earnings visibility for the near future.

Healthy dividend payout. STE has a strong history of dividend payment, even in the absence of a formal policy. It typically pays out approximately 90% of its earnings. We do not expect any major change to this assumption and believe that its yield of 5% is sustainable.

Reputation untarnished, upgrade to Buy. We believe that the latest contract win by ST Marine reaffirms STE’s reputation as a global defence engineering specialist. Its multi-pillar strategy should also offer comprehensive support for growth, prompting us to raise our forecasts to account for a more visible earnings outlook, especially from ST Marine. Our target price thus goes up from $2.88 to $3.60, pegged at the historical PER mean of 19x FY12 earnings and providing upside of 16% (including FY12F dividend of $0.17). Upgrade to Buy.

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