ST Engineering: Recent decline provides better entry point (OCBC)

Shares hurt by weak market sentiment. Since our last report on 8 Nov 2011, Singapore Technologies Engineering's (STE) share price has fallen 5.3% while the FTSE Straits Times Index (FSSTI) declined 6.0%. This was due to weak market sentiment as a result of the current global uncertainties. Despite announcing a sizable contract win worth S$441m on 18 Nov 2011, its share price has eased 2.5% compared to 1.9% drop in FSSTI. Although STE's earnings are fairly resilient, its share price declined in tandem with the sell-off in Singapore equities, albeit at a lower rate than the broader market.

Clinched S$441m new order. STE last week announced that its American subsidiary, VT Halter Marine, has won a shipbuilding contract from Hornbeck Offshore Services, Inc. This contract is worth US$353m or S$441m. The contract constitutes the construction of eight 97.2m long Offshore Supply Vessels (OSV). VT Halter Marine has started initial engineering work and actual construction of the vessels is expected to begin in 1Q12. Deliveries are scheduled for between Oct 2013 and Sep 2014. In addition, there are options for up to 24 vessels, possibly raising the total value to more than S$1.7b. At end-3Q11, STE's strong order book stood at S$11b. This latest contract win has added at least 4%, depending on the take up of options, to its order book.

EPS growth has been stable. Exhibit 1 shows the YoY earnings per share (EPS) growth of STE and its four main segments of Aerospace, Electronics, Land Systems, and Marine since 2005. While the EPS of individual segments could fall by more than 20% in a difficult year, STE group-wide EPS growth has been fairly stable through the years, including 9M11 when it recorded 7.4% of EPS growth. With the bulk of its revenue well supported by a healthy order book, STE's earnings have been remarkably resilient.

Reiterate BUY. As the global outlook is likely to remain volatile in the coming months, this will mean that the operating environment will be challenging for most corporates. In this climate, we continue to favour the defensive stocks, which will offer a better hedge against any sharp erosion in earnings. As STE's share price has corrected in recent weeks and together with an estimated dividend yield of 5.6%, we reiterate our BUY rating for the stock. We have a fair value estimate of S$3.01.