STEng – Phillip

Naval contract win to drive up valuations

Company Overview

ST Engineering (STE) is an integrated engineering group with exposures to four key business segments: Aerospace, Marine, Electronics and Land Systems. The company is also an anchor customer of Singapore’s defence industry.

  • Net income of S$576.2mn (+9.2%y-y).
  • Expect order book to hit new record in the next quarter.
  • Guidance for higher sales and profit in FY13E.
  • Dividend payout remains at 90%.
  • Maintain Accumulate with revised TP of S$4.50.

What is the news?

STE reported a strong 9.2% growth in net income on record sales of S$6.4bn in 2012. Revenue was higher across all divisions with profitability remaining little changed from the year earlier. Order book trended lower on a sequential basis to S$12.1bn (1.9X sales). The company maintained its historical payout ratio of 90% and recommended a full year DPS of 16.8cents (FY2011: 15.5cents). Management guided for stronger sales and profits in FY2013. Separately, the company recently announced a major shipbuilding contract for the Singapore Navy.

How do we view this?

The results beat our forecasts largely due to a stronger than expected end to the year. The company’s order book softened sequentially, but we expect it to hit a new record high in the next quarter after addition of the recent

shipbuilding contract for the Singapore Navy. While the contract value was not announced, we estimate it to be worth approximately S$2bn.

Investment Actions?

Despite the strong rally over the past year, we expect the stock of STE to continue trading towards the top end of its historical valuation range in the year ahead. We raised our target price to S$4.50 as we roll over our valuation basis to FY13E. Maintain Accumulate.

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