We see a buying opportunity from the recent pullback of STE’s share price. Business fundamentals remain strong but we see STE benefiting from the strengthening of the US$ with positive translation of earnings. Dividend yield has also become more attractive at 4.8%.
Maintain Outperform and target price, still based on blended valuations (P/E, DCF, Dividend yield). Given expected earnings growth of 10% for FY13, we view the current valuation of 17.5x as unjustified as it is below its pre-GFC range of 20-22x (with steady earnings growth of 11%). Key catalysts include sustained US$ strength and stronger margins from aerospace.
|ST Engineering 3 months chart|
STE’s share price has retreated about 11% over the past two weeks and has been sold down in line with the capitulation of the FSSTI. Meanwhile, US$/S$ has strengthened by about 2% since Jul 2013.
What We Think
STE derives about 30% of its revenue from the US (mostly from Aerospace and Marine). We expect STE to benefit from US$ strength in FY13.
While Singapore's economic growth is expected to grow moderately faster in 2H13 than in 1H13, helped by better global growth (in the US, China and even Europe), the sharp fall in Asia ex-Japan currencies due to worries over a repeat of the 1997-98 Asian financial crisis, and US Fed QE tapering expectations may see the S$ staying soft in the coming months.
Our house view expects S$/US$ easing to 1.29 by end-2013. In terms of sensitivity, for every S$0.01 movement in the S$/US$ rate, STE’s revenue is affected by about S$20m and PBT by S$3m.
Assuming 80% of its revenue is unhedged and exposed to translation difference, we estimate the potential earnings impact from Jul-Aug would have been S$5m or 1% to group earnings.
What You Should Do
Accumulate on recent weakness. With steady earnings growth of 7-10% and strong balance sheet (net cash of S$740m), STE delivered the fastest bounceback in share price in any sell-down. The orderbook of S$12.8bn should also provide some certainty in earnings visibility. (Read Report)
Source : CIMB Research