STEng – DBSV

All engines firing

Good start with 1Q12 net profit of S$134.4m (+ 21% yo-y) beating our estimates

Strong order win momentum in FY12 implies record orderbook levels of close to S$13bn

Healthy operating cash flows secures dividend outlook

Maintain BUY and S$3.40 TP

Highlights

Good start to the year. STE reported better-than-expected 1Q12 results, with net profit up 21% y-o-y to S$134.4m on the back of flattish revenues. 1Q12 earnings account for close to 24% of our FY12F, higher than the historical range of 19-22%, as 1Q is generally a seasonally slower quarter for STE. However, we prefer to be conservative and our earnings estimates are unchanged for FY12.

Aerospace and Electronics were the key revenue drivers in 1Q12, as Land Systems revenue declined with the completion of the UK Warthog programme in 1H2011. Gross margins improved across all key segments. While the company had to incur S$7.1m additional SG&A expenses for the Singapore Airshow in 1Q12, this was more than offset by associate contribution of about S$10.8m from Experia, the event organizer of the Singapore Airshow. Operating cash flow in 1Q12 was exceptionally strong at S$546m, due to advance payments/ deposits on newly secured contracts.

Our View

Record orderbooks provide healthy earnings visibility. STE has had a string of major contract wins YTD, including an S$880m contract from the Royal Navy of Oman, contract for building 2 AHTS vessels for Swire Pacific, and a PTF conversion order for 15 B757-200s, among others. Total announced new orders exceed S$1.9bn already in FY12, compared to about S$3.2bn order wins announced in full-year FY11. This brings the outstanding orderbook to an estimated record level of ~S$13bn.

Recommendation

Maintain BUY. Given the recent spate of contracts and attempts at revving up some inorganic growth engines, STE’s growth trajectory seems to be on track. STE looks set to make bigger strides in the Electronics and Land Systems sectors, and has recently teamed with US-based Fortune-500 company Science Applications International Corporation (SAIC) to bid for the US Marine Personnel Carrier program in future. Given the healthy earnings visibility, strong balance sheet and attractive dividend yield of over 5.5%, we maintain our BUY call on the stock with an unchanged TP of S$3.40.

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