Worth the premium valuations, BUY. ST Engineering (STE) is in the running for a major contract from the US Coast Guard (USCG), which could be worth c.USD10b. This could be announced as early as 3Q13. If it succeeds, it will validate its long-term presence in the US, where its subsidiary VT Halter Marine has been operating for the last decade. Closer to home, a recent Singapore Navy patrol vessel contract could be its biggest since 2008. Despite premium valuations, its defence and commercial-driven record order book (SGD13b) along with potential catalysts in the form of a major billion-dollar contract continue to justify a BUY rating. As a heuristic gauge of the stock’s valuation, STE trades at an undemanding market capitalisation-to-order ratio of 1.0x, which is below its market cycle average of 1.2x. Our target price of SGD4.80 is based on 23x blended FY13/14 PER.

Potential near-term catalyst in USD10b USCG contract. ST Engineering’s US shipyard VT Halter Marine (VTHM) is currently bidding for the design and construction of 25 offshore patrol cutters for the USCG, which could be worth c.USD10bn. If it succeeds, this will be a major catalyst for the stock. The original schedule from the USCG suggests the preliminary contract could be awarded as soon as this quarter.

Singapore Navy patrol vessel contract likely to be the biggest deal in years. Clinched in Jan 2013, a Republic of Singapore Navy (RSN) contract for eight new patrol vessels could be its largest since the frigate programme of 2002/08. While the contract value is top secret, STE is a beneficiary of the continued outsourcing and rising use of technology in Singapore’s small, but technologically-advanced armed forces.

Major freighter conversion opportunity. ST Aerospace’s recentlyacquired 35% stake in EADS EFW, a Centre of Excellence for freighter conversions, is meant to leverage on its years of experience in passenger-to-freighter (PTF) conversions. It plans to develop a conversion package for two versions of converted freighters – A330- 200P2F and A330-300P2F – where there is a major market opportunity, as Airbus estimates that 847 mid-sized aircraft would be converted into freighters over the next 20 years.

Source: Maybank Kim Eng Research - 29 Jul 2013