Singapore Technologies Engineering - Buy: Strength Amid Adversity

Maintain Buy – Share price outperformance has reversed (-20% vs. STI) post 1Q09 results and buying opportunities exist; earnings look poised to improve, with concerns, particularly MRO biz and margins, appearing overdone. ~6% dividend yield, record high orderbook and new orders in the pipeline – despite uncertain macro environment – strengthen the investment merits. We reiterate our confidence in mgmt execution and see >10% upside from current levels.

Key highlights – Chat with mgmt suggests infrastructure projects in the region have picked up; therefore Electronics (~20% of EPS) has potential to surprise. We also remain confident in the PTF conversion programs; delay risks should abate with recent cargo yields stabilizing. In the longer term, executing pipeline of MRO initiatives (e.g. GE and CFM engines; new capabilities) will be a key focus. ST Eng needs to translate outsourcing potential to stable revenue baseload and margins. We believe earnings from 2010 should reflect this.

M&A strategy – Recent acquisition of Precision Products, a casting and tooling manufacturer, suggest ongoing efforts to selectively use M&A to plug technical capabilities gaps and enlarge scope of services. We think more M&A deals may follow as valuations are now at more reasonable levels.

Encouraging new orders profile – The >S$200mn new orders secured in 2Q09 to date reflects: 1) diversification – greater proportion of orders from public sector, 2) repeat contracts, e.g. Guangzhou Metro for systems work, 3) secure new customers, e.g. Chittagong Port Authority contract for MIS system and Swedish Defense order for 40mm ammunition.

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