ST Engineering Ltd - Singapore Technologies Engineering Ltd: Resilient earnings (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$2.95

Fair Value: S$3.37

Management confident of a stronger 2H11. We recently caught up with the management of Singapore Technologies Engineering Ltd (STE) to get an update on the group. STE historically has a stronger second half of the year, compared to the first half. Barring unforeseen circumstances, management is confident this will also be the case in 2H11. With STE's 1H11 net earnings meeting 47.4% of our FY11 estimates, STE looks on track to meet our FY11 expectations, despite a weakening US$.

Earnings model fine-tuned. Nevertheless, our earnings model has been fine-tuned to further segregate STE's four main segments into their respective sub-segments for greater granularity. (See Exhibits 1 to 5 for a graphical representation of the revenue and pre-tax profit contribution of STE's four main segments and the respective sub-segments.) Despite this fine-tuning exercise, we have maintained our FY11 earnings estimate of STE at S$510m.

Risks and downside protection. Equity markets around the world have seen higher volatility in recent weeks and talks of the global economy heading for a recession is gathering pace, as investors are more unsure about the near-term outlook. During the equity sell-off in early 2009 caused by the global financial crisis, STE's implied forward P/E fell by more than two standard deviations below its historical average. However, STE's earnings are resilient in nature. STE has 1) a large stable stream of revenue coming from government-related projects; 2) a strong order book and a sizeable chunk of its non-government business under long-term contracts; and 3) a profitable and extremely cash generative business model. Furthermore, STE's 90% dividend payout policy gives it a high dividend yield of 5.1%. These four factors collectively provide good downside protection, making STE a good name to own if one wants to stay invested in equities. At the current price of S$2.95, STE is priced at 17.0x P/E based on our earnings estimates over the next four quarters. This means STE is already trading at more than one standard deviation below its historical average forward P/E of 19.4x. (See Exhibit 6 for STE's historical average forward P/E.)

Maintain BUY. Given STE's resilient earnings, we used its historical average forward P/E of 19.4x against its net earnings estimates over the next four quarters to arrive at a fair value of S$3.37 per share, down from S$3.58 previously. As the new fair value still represents 14.2% upside, we maintain our BUY call.

OKP Holdings Limited - Initiate with BUY - Excellent revenue visibility (OCBC)

Initiating Coverage BUY

Current Price: S$0.575

Fair Value: S$0.65

Established road infrastructure construction firm. OKP Holdings has an impressive track record of wide ranging infrastructure projects for prominent customers, such as Land Transport Authority (LTA), Jurong Town Corporation (JTC) and Public Utilities Board (PUB). To date, they have completed more than S$250m (excluding mega contract for CTE) worth of roads and civil engineering projects for LTA, and continues to win sizable public infrastructure tenders.

Excellent revenue visibility. The company's current order book is c.S$370m, and will stretch till end of 2014. Given OKP's highly selective tendering process and solid execution track record (ZERO delays in its operating history), the projects can reasonably be expected to be profitable and well managed. OKP's market share for public infrastructure projects in recent years has been healthy, and we believe it will continue to remain so. On top of its firm foothold in the public space, OKP believes revenue can be broader based in future, with expansion into property construction, oil and gas and even MRT lines projects possible.

Healthy balance sheet will give strategic flexibility. As of end-2Q11, OKP's cash holdings make up c.57% of its market capitalisation. The company has virtually no debt and operates on a net cash basis. Such a "war chest" will give OKP's management flexibility in pursuing different avenues of growth, such as property construction and even property development, given its partnership with China Sonangol. The effective management of Property, Plant and Equipment (PPE) has also allowed the company to stretch the useful lives of their machineries, thereby reducing unnecessary capex and thus saving cash for OKP.

Strong margins vis-a-vis peers plus undemanding valuations - initiate with BUY. Relative to construction peers, OKP's operating and net margins lie above industry averages. We expect its superior margins to continue, because: 1) recent wins on its order books hold clauses which protect OKP against significantly higher material prices; 2) increased number of Design & Build contracts in the pipeline should yield bigger margins; and 3) the fact that the company has factored in labour costs trends when tendering for projects. Despite its sound performance, the company's forward P/E for 2011 and 2012 lies below industry averages, making valuations undemanding. We assume that OKP will continue to enjoy similar market share of future public infrastructure projects, adding ~S$156m of new contracts each year for both FY12 and FY13. We also forecast EPS of S$0.093 and S$0.095 for FY12 and FY13, respectively. Applying the industry average of 7x forward P/E to FY12 EPS, we derive a fair value of S$0.65, implying 13% upside. Initiate with BUY.

CHEUNG WOH TECH (Lim&Tan)

S$0.17-CWOT.SI

􀁺 Management said that a major solar customer Solyndra LLC has filed for bankruptcy in the US.

􀁺 As at 31 Aug ’11, the company still owes them S$832,000, undelivered inventories stands at S$403,000 and production equipment bought specifically for them has a net book value of S$459,000.

􀁺 Cheung Woh will be recording contingent losses of S$1.7mln in the company’s upcoming 2Q ended Aug ’11.

􀁺 Despite the above, management expects to remain profitable for the quarter. This implies that operating profit would be more than S$1.7mln. Year ago profit was $2.4mln, while quarter ago profit was $2.9mln.

􀁺 Being a major and fast growing customer of Cheung Woh in the solar segment, management would have to find a replacement fast to pluck the hole.

􀁺 Cheung Woh had recently announced that they are divesting their controlling interest in their automotive business in China to refocus on their hard disk drive and solar businesses.

􀁺 At 17 cents, market cap is $53.22mln and the stock has halved from its 52 week high and is not far off from its 52 week low of 15.5 cents hit on 19 Aug ’11. Trailing PE is 3x.