STEng – MayBank Kim Eng

Defence’s Turn in the Limelight

Defence outlook complementing commercial – reiterate BUY. We reiterate our BUY call on ST Engineering (STE), as a positive defence business outlook lends support to the thesis that it should trade at a premium to its historical average. We maintain our target price at SGD4.40, pegged to 21.6x FY2013 PER, 1 standard deviation above its historical mean. STE’s orderbook, expected to reach record heights again in 1Q13 continues to provide clear earnings visibility, together with a healthy dividend yield of 4.4%.

MINDEF and other defence contracts take centre-stage. Two of STE’s largest contracts announced to-date have been derived from its defence business, and both from its Marine arm. The first, an SGD880m contract for 4 naval vessels from the Royal Navy of Oman, followed by a Jan 2013 contract with MINDEF for 8 patrol vessels, which we estimate to be worth ~SGD1.8b. We continue to see healthy defence expenditure trends both in terms of Singapore (CAGR 4%) as well as from STE’s overseas customers (CAGR 4-5%).

Four business segments a formidable mix. We also maintain that each of ST Engineering’s four business segments of aerospace, marine, electronics and land systems have clear skies ahead in terms of business outlook. Commercial contracts (63% by total FY2012 revenue) such as aerospace MRO, electronics’ rail and road systems, marine shipbuilding continue to complement the defence business and maintain a healthy record of contract wins.

Reiterate BUY, 1Q13 orderbook catalyst on the way. We reiterate our BUY recommendation on STE, with a view towards its 1Q13 orderbook setting yet another record (~SGD13b), providing the earnings visibility that would catalyse its share price appreciation. Our target price of SGD4.40 remains pegged to 21.6x FY2013 PER, 1 SD above its historical average. Investors who own the stock before Ex-Div on 26 Apr will stand to enjoy SG 13.8 cts / share of dividends (translating to ~3.3% yield).

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