STEng – DBSV

More to look forward to

  • FY12 net profit of S$576m (+9% y-o-y) in line; final dividend of 13.8Scts (FY12: 12.5Scts)
  • Upside to end-FY12 orderbook of S$12.1bn from recent Singapore navy contract
  • MRO revenues recovering; potential for upside surprise from pick up in US operations
  • Valuations have not peaked; maintain BUY with higher TP of S$4.40

Strong earnings growth in FY12. Results for 4Q12 and FY12 were in line with estimates. STE reported net profit of S$576m for FY12, up 9% y-o-y on the back of 6% growth in revenue to S$6.4bn. Earnings were mainly driven by Aerospace and Electronics segments, but all divisions showed improvement. Results would have been better if not for higher allowances for doubtful debts, impairment of goodwill and higher tax charges. Group PBT margin remained stable at 11%. Aerospace margins improved to 15% despite start-up losses at new projects.

Potential upside to orderbook, earnings. STE finished the year with an orderbook of S$12.1bn, but this could be boosted by another S$1.5-2bn (our estimate) from the recently secured contract to build 8 patrol vessels for the Singapore Navy. We conservatively expect earnings growth of about 6% p.a.in FY13/14F, but there is upside potential from the MRO division, where business has been picking up, especially in the US.

Maintain BUY; room to re-rate further. While the stock is currently trading at 20x FY13 PE, it is still below the +2 S.D. level, unlike some of the other dividend yield names in the market. In terms of yield spreads, we are still not quite close to the previous peaks. With yield compression in vogue, we reckon there is room for further upside. Thus, we maintain our BUY call on STE with a revised TP of S$4.40, premised on higher valuation metrics, as justified above. With healthy earnings growth of about 6% and yield of about 4.5%, we believe the stock still presents one of the more compelling investment cases among the defensive, dividend yield names listed on the SGX.

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