STEng – MayBank Kim Eng

Robust Outlook To Support Lofty Valuations

  • Despite premium valuations, ST Engineering (STE)’s defence and commercial-driven record order book of SGD13b, along with a potential catalyst in the form of a major billion-dollar contract, continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.
  • STE is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008.
  • ST Aerospace’s recent acquisition of a 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330-200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.


 

STEng – MayBank Kim Eng

Robust Outlook To Support Lofty Valuations

  • Despite premium valuations, ST Engineering (STE)’s defence and commercial-driven record order book of SGD13b, along with a potential catalyst in the form of a major billion-dollar contract, continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.
  • STE is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008.
  • ST Aerospace’s recent acquisition of a 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330-200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.


 

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