ST Engineering (KimEng)

Event:
ST Engineering’s (STE) share price has hit new one‐year lows and is off by 13.5% year‐to‐date. While some recent negative news has had an impact, its earnings were relatively intact. Its current forecast dividend yield of 5.7% warrants a relook at the stock. However, we maintain our HOLD recommendation as its forward PER still stands at 15.7x. Our target price of $3.15 is unchanged, with upside of 9%.

Our View:
ST Marine has been issued a $63.5m letter of claim from Louis Dreyfus regarding its $179m shipbuilding contract for a Roll‐on/Roll‐off Passenger Ferry (Ropax). This is for an alleged delay of delivery and claim that the vessel is not up to specifications. STE is disputing this and is countering with a breach of contract claim. While this matter will take some time to be settled in court, STE has also stated that if liable, its total liability under the terms of the Ropax contract is capped at 10% of the contract price, or $17.9m.

STE has still been steadily securing new contracts across all its operating divisions. This included a recent contract worth $171m (exequipment) for ST Marine for the construction of four AHTS vessels. ST Aerospace, too, has secured some $320m worth of maintenance contracts in 1Q11 for both military and civilian aircraft, despite a soft market.

STE expects to achieve better PBT in FY11 versus FY10. Excluding the possible provision for the Ropax contract, we are maintaining our forecasts and expect earnings to grow by 14% in FY11.

Action & Recommendation:
STE’s orderbook of $11.3b forms a strong baseload for FY11 earnings. Though currently trading at the low‐end of its recent PER band, the stock still looks well‐priced at 15.7x FY11F PER. Our target price of $3.15 is based on 17x PER. STE’s forward dividend yield of 5.7% remains attractive and we assume a continuation of the 90% payout ratio. Maintain HOLD.