HIGHER S$3.50 FAIR VALUE ON STRONG CONTRACT WINS

•Aerospace won $540m of new contracts

•Total of S$1.5b of new orders in 1Q12

•Restores confidence in defence sales

ST Aerospace won $540m of new contracts

ST Engineering (STE) announced that its aerospace arm, ST Aerospace, has secured a total of ~$540m worth of contracts in 1Q12. STE added that these contracts are to be carried out at its maintenance, repair and overhaul (MRO) locations around the world. Also included in the new contacts are passenger-to-freighter conversions of 15 Boeing 757-200 aircraft.

S$1.5b of new orders in 1Q12

Together with its recent announcements, STE has announced a total of ~S$1.5b worth of new orders in 1Q12. STE earlier reported that in 1Q12, its electronics segment won a total of ~S$100m of new contracts while its marine arm was awarded a contract worth €534.8m (~S$880m) to build four patrol vessels for the Royal Navy of Oman. With the strong order flow in 1Q12, STE’s robust S$12.3b order book at the end of FY11 has likely grown further by end-1Q12.

Restores investors’ confidence in defence sales

The ~S$880m contract to build patrol vessels for the Royal Navy of Oman, in particular, should restore investors’ confidence in STE’s defence sales. This comes after news reports of the Indian Ministry of Defence blacklisting six defence firms, including STE’s subsidiary ST Kinetics (STK), from doing business in India over the next 10 years. Furthermore, STE has vigorously maintained its innocence of any wrongdoing resulting in this disbarment.

Maintain BUY with higher fair value of $3.50

STE’s recent strong flow of new orders should improve sentiments on its shares. Thus, we assigned a higher P/E multiple of 20x, from 19x previously, to its EPS over the next four quarters and derived a new fair value of S$3.50/share, from S$3.32/share previously. We maintain our BUY rating on STE.

Big boost to orderbook

• S$880m defence-related contract from new overseas Navy customer should renew faith in STE’s capabilities, reputation and demonstrate its resilient business model

• Recovery in the US economy will further benefit STE; US$ weakness is unlikely to be a concern in FY12

• Dividend yield remains healthy at 5.3%, upgrade to BUY with revised TP of S$3.40

Biggest contract win for Marine in recent years. ST Engineering’s shipbuilding and shiprepair arm ST Marine has won a EUR534.8m (S$880m) contract to design and build 4 patrol vessels (PVs) and provide associated logistic support for the Royal Navy of Oman. ST Marine will build four 75-metre PVs based on its proprietary Fearless Class of PVs. The project will commence immediately, with deliveries expected between 2Q 2015 and 3Q 2016.

Further strengthen track record in securing overseas customers for its defence sales, as the Sultanate of Oman is a new customer for STE. This is ST Marine’s second significant contract win for the year, following an order for 2 AHTS vessels from Swire Pacific Offshore in February, and brings total order wins YTD in 2012 to S$1.3bn. With S$3.2bn worth of new contracts secured in FY11, outstanding orderbook could reach a record level exceeding US$12.5bn, providing healthy earnings visibility in FY12/13F.

Upgrade to BUY. This contract win should help refocus investors’ attention on the resilient nature of STE’s business and away from the media hype about proceedings against ST Kinetics in India, which is immaterial to earnings and at worst, an opportunity loss. We revise up our FY12/13 earnings estimates by 1-2%. With the recent acquisition of NeraTel, STE’s growth trajectory looks set to be on track, especially as concerns over US$ fades and the US economy – to which STE has significant exposure – is showing signs of recovery. As such, we upgrade the stock to BUY with a revised TP of S$3.40, given the better earnings outlook, strong balance sheet and healthy dividend yield of over 5%.

ST Marine bags 534.8m euro Oman navy deal

It will build patrol vessels, provide logistic support

SINGAPORE Technologies Engineering’s (ST Engineering’s) marine arm has secured a contract worth 534.8 million euros (S$880 million) from the Royal Navy of Oman (RNO).

The contract – to design and build four patrol vessels (PVs) and the provision of associated logistic support to the RNO – was awarded to Singapore Technologies Marine (ST Marine) by the Ministry of Defence of the Sultanate of Oman, through a competitive international tender.

In a filing to the Singapore Exchange (SGX) yesterday, ST Engineering said that ST Marine will build four 75-metre PVs, with the project commencing immediately.

The first vessel is expected to be delivered in Q2 2015, and the final vessel in Q3 2016.

Said ST Marine president Ng Sing Chan: ‘We are honoured to be entrusted by the RNO with this project. This is a significant contract to ST Marine and we are confident that we will live up to our reputation as a total naval solutions provider – from design to construction to logistics support and hopefully through life support for our customer’s vessels.’

The contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year.

Just last week, ST Engineering announced that a 51:49 joint venture company (JVC) between ST Marine and Swedish Kockums AB respectively had been formed.

The two companies have had a long-standing partnership managing several contracts for the Republic of Singapore Navy’s (RSN’s) submarines.

Now a subsidiary of ST Marine, the JVC, known as Fortis Marine Solutions Pte Ltd, was formed with the primary objective of providing a ‘higher level in-country capability, in the refitting and life cycle support services for the submarine fleet of RSN’.

In addition, ST Engineering said last week that its electronics sector had secured new contracts worth about $100 million in the first quarter of this year.

These wins included contracts for rail electronics solutions and satellite communications systems.

ST Engineering shares fell five cents yesterday to close trading at $3.09 per share amid a market retreat in Asian bourses.

ST Marine bags 534.8m euro Oman navy deal

It will build patrol vessels, provide logistic support

SINGAPORE Technologies Engineering’s (ST Engineering’s) marine arm has secured a contract worth 534.8 million euros (S$880 million) from the Royal Navy of Oman (RNO).

The contract – to design and build four patrol vessels (PVs) and the provision of associated logistic support to the RNO – was awarded to Singapore Technologies Marine (ST Marine) by the Ministry of Defence of the Sultanate of Oman, through a competitive international tender.

In a filing to the Singapore Exchange (SGX) yesterday, ST Engineering said that ST Marine will build four 75-metre PVs, with the project commencing immediately.

The first vessel is expected to be delivered in Q2 2015, and the final vessel in Q3 2016.

Said ST Marine president Ng Sing Chan: ‘We are honoured to be entrusted by the RNO with this project. This is a significant contract to ST Marine and we are confident that we will live up to our reputation as a total naval solutions provider – from design to construction to logistics support and hopefully through life support for our customer’s vessels.’

The contract is not expected to have any material impact on the consolidated net tangible assets per share and earnings per share of ST Engineering for the current financial year.

Just last week, ST Engineering announced that a 51:49 joint venture company (JVC) between ST Marine and Swedish Kockums AB respectively had been formed.

The two companies have had a long-standing partnership managing several contracts for the Republic of Singapore Navy’s (RSN’s) submarines.

Now a subsidiary of ST Marine, the JVC, known as Fortis Marine Solutions Pte Ltd, was formed with the primary objective of providing a ‘higher level in-country capability, in the refitting and life cycle support services for the submarine fleet of RSN’.

In addition, ST Engineering said last week that its electronics sector had secured new contracts worth about $100 million in the first quarter of this year.

These wins included contracts for rail electronics solutions and satellite communications systems.

ST Engineering shares fell five cents yesterday to close trading at $3.09 per share amid a market retreat in Asian bourses.

Prized for stability and attractive yield

The big picture. Investors buy ST Engineering (STE) for its attractive 5% dividend yield. On its part, the company continues to deliver on its earnings despite a challenging environment. However, share price upside is limited by a lack of fresh catalysts. While we believe that the negative press on its India defence issue is overblown, any pullback on the back of this presents a good entry point. Fundamentally, the stock remains a Hold as the forward PER of 17x represents full value.

India debarment not a big deal. STE’s defence-related subsidiary ST Kinetics was blacklisted by India’s Criminal Bureau of Investigation in connection with a corruption probe at India’s defence procurement agency. STE said there is no evidence implicating them. However, with a reputation to protect, we understand its insistence in clearing its name. Though India has never been a major contributor to its defence earnings, the country’s potential as a major arms buyer is significant. A clean reputation is useful in bidding for defence contracts globally.

Yields sustainable. Following its 7% growth in net earnings for FY11, STE declared a final and special dividend totalling 12.5 cents per share for a full-year payout of 15.5 cents per share, or a yield of 4.9%. Exdate is 25 April 2012. Even though STE expects to maintain its healthy payout ratio of 90% of earnings, we note that it was cash-flow-negative in 2011 due to higher working capital on negative variances in receivables and advances, as well as higher capex. We expect this situation to normalise in FY12. Cash and equivalents stands at $1.36b.

Neutral, all things considered. STE’s $12.3b orderbook supports earnings across the different divisions. It also has a healthy mix of commercial and military contracts. The company expects to achieve higher earnings for FY12, which is in line with our forecast of a modest 7% earnings growth. This will support its dividend payout and mitigate any downside. However, a lack of clear catalysts also limits upside, hence our Hold recommendation on the stock. Our target price of $2.88 remains pegged at 15x forward earnings, in line with its historical mean.