ST Engineering stays strong with S$1.43b worth of orders in 2011

Defensiveness stands out in volatility
Unscathed. This should be the best time to buy STE for its defensive quality in the face of volatile markets. Indeed, its share price has outperformed the market by an average of 11% in the last three months while other offshore & marine/conglomerate stocks are down about 10% relative to the market. We believe a solid balance sheet with a netcash position, a secure order book and below historical average trading valuations could be its winning factors.

Zero order-book risk, we believe. Unlike its conglomerate peers with substantial exposure to the offshore & marine space, we believe STE’s order book is secure with almost zero risk of cancellations as 40-50% of its contracts are defence-related or from government bodies. Even in the aerospace unit, risks are fairly spread among defence and established customers with strong financials including Fedex, Boeing, Airbus, American Airlines, UPS, Japan Airlines and ANA. Most of its MRO contracts are also long term (of above five years).

Contract wins unappreciated. We believe the market has not appreciated STE’s consistent order wins mainly due to a lack of transparency from defence-related contracts. We estimate that the group could have chalked up more than S$1.5bn worth of orders YTD, although only S$1.43bn have been disclosed. These include the latest contracts from ST Electronics to build a data centre for Hong Leong Finance with 10-year maintenance services, as well as S$260m of bundled MRO contracts secured by ST Aerospace in 2Q11.

High yields and cash-rich
S$220m net cash is a plus in tough times. STE boasts a solid balance sheet with net cash of S$220m and healthy operating cash flows of S$35m, as of 1H11. We believe this bodes well for STE in its search for M&A opportunities in tough times. STE is also one of two companies in Singapore with an AAA rating from Moody’s.

Sensible capital management with 90% payout. We believe STE will continue its 90% dividend payouts in the foreseeable future which offer fairly attractive yields of about 6%, only slightly below the 7% from telcos and REITs.