STEng – OCBC

RESILIENT EARNINGS THROUGH DIVERSIFIED BUSINESSES

  • Solid 9M12 results, as expected
  • Increasing earnings visibility
  • Downgrade to HOLD on price outperformance

Good price performance for 2012 YTD

STE has been having a good run, and YTD its share price has climbed 44%, outpacing the STI Index, which climbed only 19%. In the uncertain economic environment, investors have been seeking defensive businesses with good dividend yields and STE’s share price has benefited. The growth in air passenger traffic has supported the earnings of MRO providers. For 9MCY12, the aerospace division registered 9.3% YoY growth in pre-tax profit to S$226.7m. Apart from its aerospace segment, which contributes the most to its top-line and bottom-line, the other business lines are fairly defensive in nature, due to government-related projects. Commercial sales formed 65% of total sales in 3Q12 (versus 62% in 3Q11).

Overall solid results, as expected

To recap, 9M12 results were in line with our expectations, with earnings per share of 13.79 S cents (on a fully diluted basis) forming 76% of our FY12F estimate of 18.2 S cents. As of end-Sep, STE’s order book stood at S$12.5b, of which about S$1.4b is expected to be delivered in 4Q12. STE expects to achieve higher revenue and PBT for FY12, compared to FY11.

Order book has been growing over the LT

As we noted in our 28 Sep report, STE’s order book (as 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 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.

Downgrade to HOLD

We maintain our fair value of S$3.90 on STE but downgrade it to a HOLD, since the share price has run up a fair bit already. We would be buyers at S$3.66.

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