STEng – Phillip

1QFY11 forms 20% of forecast; still undervalued

• Revenue increased by 15.2% to S$1.57bn, PATMI increased 19.7% to S$111mn

• Strong order book of S$11.3bn

• 1QFY11 forms 20% of FY forecast

• Kept forecasts unchanged

• Maintain Buy recommendation with target price of S$3.76

1QFY11 results discussion. Revenue for 1QFY11 was significantly higher than the same period last year primarily due to several milestone project completions and deliveries from various segments. Consequently, PATMI recorded a strong 19.7% surge to make up 20% of our full year forecast. The order book of the group is currently worth S$11.3bn (1.8X sales) and management guided that c.S$3bn would be realized over the rest of the year. STE’s order book typically accounts for c.60-70% of the year’s sales. Assuming these S$3bn of orders form 65% of sales for the rest of the year, full year revenue would be worth S$6.18bn (vs PSR est: S$6.23bn). Hence, we believe our forecasted sales for the year is

realistic and could have further upside if STE wins significant contracts hereon.

Risks. Further weakening of US$ & € against S$; Slow down in capacity added by commercial customers; Rise in interest rates could reduce attractiveness of STE’s dividend yield; Greater risk appetite by investors could reduce demand for low beta stocks.

Valuation. We used a blended valuation model of DCF (COE: 7.9%, terminal g: 3.5%) & P/E (20X FY11E EPS) to arrive at our target price of S$3.76. After incorporating dividend forecast of 14.8cents, we expect total returns of 26.8% to our target price. At the current market price, STE trades at merely 17X FY11E EPS as compared to its full cycle average of 19X P/E.