ST Engineering - Order book: more than meets the eye

STE routinely secures orders which it does not announce, due to client sensitivities. We estimate these ‘secret’, mostly defence-driven contracts amount to about S$485m in a typical quarter, but have recently risen to a multi-year high. On our estimates, the value of unannounced contracts exceeded S$1bn on 3 occasions in the last 5 quarters. Q109 order book was at a record S$11bn. Rising customer advances support our case: though only S$7m of contracts were announced in Q109, total customer advances increased by S$250m to a record S$1.34bn.

Our findings suggest ‘windfall’ orders of over S$2.1bn, which translates into additional S$267m net profits STE could book in over the coming years. The size of the non-commercial orders secured lately suggests the market might be overlyworried about the aerospace business and underestimating the quality of STE’s future earnings stream.

STE trades at 16.4x on 1-year forward earnings, and close to its minus-one standard deviation of 15.8x (Jan 2000-present). Moreover, based on our recent interactions with management, we believe that the company remains committed topaying 100% of earnings in dividends.

We continue to derive our PT using DCF-based methodology, but now explicitly forecast long-term valuation drivers using UBS’s VCAM tool.

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