ST Engineering

ST Engineering: CIMB has O/p Call with $3.61 TP. Recommend investors to ‘Protect your Portfolio’, and now is the best time to buy STE for its defensive quality in the face of volatile markets. Share price has outperformed the mkt by 11% in the last three mths. With little room for sharp depreciation in the US$, hanging on to hopes of earnings surprises, which house believe can offer re-rating catalysts.

Believe current valuations of 15x CY12 P/E (average trading band of 16x during the previous crisis) have priced in fears of US$ deterioration and macro uncertainties. Unlike its conglomerate peers with substantial exposure to the O&M space, STE’s order book ($10.8b) is secure with almost zero risk of cancellations as 40-50% of its contracts are defence-related.

Commercial contracts are mostly from long-term customers with strong financials including Fedex, American Airlines and Japanese airlines. STE has also been chalking up orders from all segments worth about $1.5b YTD, while with more than 1,500 narrow-body aircraft (delivered in 2009-2010) could be scheduled for checks (18-24-mth cycle) starting 2H11, affirming house view that the MRO recovery is on track.

STE offers a safe refuge with its fairly attractive dividend yields of about 6%, only slightly lower than the 7% from telcos and REITs. The yield is also backed by a solid balance sheet as it continues to generate net cash ($220m as of 1H11). It is also one of two Co’s in SG with an AAA rating (the other being Temasek) from Moody’s.