STEng – OCBC

DEFENSIVE PLAY WITH ROOM TO CLIMB

  • Mid-cycle multiple
  • Order book may surpass S$13b
  • Increasing earnings visibility

Share price can climb further

A safe haven in turbulent times, STE has outperformed the STI significantly since the beginning of the year, rising 29.0% versus the 15.6% increase by the index. The stock reached its 52-week high of S$3.55 last Friday. The counter is trading at a historical P/E multiple of 20.1x and should still have room to climb (about half a standard deviation above 10-year average). STE’s earnings are fairly stable given its four main diversified businesses, which help to reduce its exposure to sector-specific risks. With an attractive FY12F dividend yield of ~4.8%, STE should continue to perform in today’s uncertain but liquidity-rich global economic environment.

ST Marine wins S$179m worth of contracts

It has recently been announced that ST Marine has secured shipbuilding and repair contracts worth ~S$179m. These wins include a contract to build two additional Offshore Support Vessels (OSVs) for Hornbeck Offshore Services, LLC, as well as a series of repair and upgrading projects. With STE’s order book standing at S$12.9b as of end-1H12, we think that it may be greater than S$13b by the end of 3Q12 and expect continued order book growth.

Looking further into the future

We think it is worthwhile noting that STE’s order book clocked at the end of each year has on average grown faster than the following year’s annual revenue. The order book grew 16% p.a. between end-2005 and end-2010 from S$5.38b to S$11.5b while annual revenues grew 6% p.a. between FY06 and FY11. This trend probably suggests that the average tenure of order book contracts has been increasing. The fact that the order book has been growing faster than revenue implies increasing earnings visibility into the future.

Raise fair value to S$3.81

Rolling forward our valuation to blended 2H12/1H13 EPS and increasing our P/E multiple from 20.0x to 20.5x, we raise our fair value from S$3.50 to S$3.81 and maintain a BUY.

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