Asia Pacific Equity Research 27 February 2015

Overweight

ST Engineering

STEG.SI, STE SP Price: S$3.55

Results in line, earnings growth to pick up more strongly from 2016; stay OW

Price Target: S$4.30

We remain buyers as ST Eng's valuations are attractive (32% below peak even though its order book remains high) given its higher profitability (ROE 25% in 2015E). Key catalysts: 1) orderbook of $12.5B (-5% y/y, -5% q/q) still relatively high by historical standards, 2) lower fuel prices should help boost aircraft utilization and MRO demand, 3) more contract wins, 4) stronger USD, 5) improving operating efficiency, 6) industry M&A.  4Q results in-line with ours/market expectations: 4Q14 net profit fell 16% y/y but rose 16% q/q to S$140MM, raising 2014 net profit to S$532MM, 8% lower y/y. Net profit margin was 7.6%, 1ppt lower y/y and steady q/q while 2014 net profit margin was 8.1%, 1ppt lower y/y. ROE was c.25%. End-Dec net cash was S$518.6MM or S$0.17/share (c.4.8% of current market cap). ST Engineering generated positive free cash flow of S$466.8MM, 31% lower y/y. Final DPS of S$0.04 and Special DPS of S$0.07, raising total 2014 DPS to S$0.15, steady y/y implying a payout ratio of 88% and dividend yield of 4.3%. Commercial sales accounted for 61% of 2014 revenue. 2014 revenue breakdown by geography: Asia 57.8%, USA 23.3%, Europe 4.4%, Others 14.4%.  Aerospace’s PBT fell 17% y/y in 4Q14 but is likely to be stable y/y in 2015E with rising aircraft utilization as airlines will likely raise capacity with lower breakeven costs as fuel prices fall. The Asian/global airlines’ c.7%/c.6% pa long-term fleet growth should support MRO demand. Aerospace’s contracts announced totaled S$310MM, 60% lower y/y and 31% lower q/q in 4Q14, partly due to high base from a large multi-year contract won in 4Q13.  Electronics’ PBT rose 21% y/y in 4Q14 and is expected to rise y/y in 2015 as well. We expect revenue and earnings growth momentum to pick up longer term. Electronics’ contracts announced totaled S$509MM, 14% lower y/y, 1% lower q/q in 4Q14. The rapid expansion of rail links in Asia, upgrades in Developed Markets should support long-term growth.  Marine’s PBT fell 28% y/y in 4Q14 and is expected to be stable y/y in 2015. US ship repair revenue is expected to improve y/y but overall revenue is likely to fall. Lower oil price is likely to dampen OSV ordering prospects near term.  Land Systems’ PBT fell 97% y/y in 4Q14, mainly due to weaker specialty business in China and absence of disposal gains but is expected to be steady y/y in 2015 as the coming quarters will see some deliveries picking up on the defense side. ST Engineering Ltd (Reuters: STEG.SI, Bloomberg: STE SP) S$ in mn, year-end Dec FY13A FY14A FY15E Revenue (S$ mn) 6,633 6,539 6,557 Net Profit (S$ mn) 581 532 544 EPS (S$) 0.19 0.17 0.18 DPS (S$) 0.15 0.15 0.13 Revenue growth (%) 4.0% (1.4%) 0.3% EPS growth (%) (0.2%) (8.9%) 2.7% ROCE 16.4% 13.8% 14.7% ROE 29.0% 25.0% 24.7% P/E (x) 19.0 20.8 20.3 P/BV (x) 5.2 5.2 4.9 EV/EBITDA (x) 13.3 15.2 13.9 Dividend Yield 4.2% 4.2% 3.7%

FY16E 6,942 582 0.19 0.14 5.9% 6.8% 15.1% 24.8% 19.0 4.6 13.2 4.0%

FY17E 7,411 638 0.21 0.15 6.7% 9.7% 15.9% 25.6% 17.3 4.3 12.2 4.3%

Singapore Aerospace Corrine Png

AC

(65) 6882-1514 [email protected] Bloomberg JPMA PNG J.P. Morgan Securities Singapore Private Limited Price Performance 4.4 4.0 S$ 3.6 3.2 Feb-14

May-14

Aug-14

Nov-14

Feb-15

STEG.SI share price (S$) FTSTI (rebased)

Abs Rel

YTD 4.4% 2.6%

1m 4.7% 3.9%

Company Data Shares O/S (mn) Market Cap (S$ mn) Market Cap ($ mn) Price (S$) Date Of Price Free Float(%) 3M - Avg daily vol (mn) 3M - Avg daily val (S$ mn) 3M - Avg daily val ($ mn) FTSTI Exchange Rate Price Target End Date

3m 4.7% 2.4%

12m -7.1% -18.0%

3,118 11,069 8,151 3.55 26 Feb 15 49.8% 2.84 9.63 7.1 3426.18 1.36 31-Dec-15

Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 23 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Upside risks to our view: Better-than-expected air travel demand resulting in airline capacity additions and MRO demand, lower bad debt provisions, wage pressure eases

Key financial metrics Revenues (LC) Revenue growth (%) EBITDA (LC) EBITDA margin (%) Tax rate (%)

FY14A 6,539 -1.4% 709 10.8% 17.5%

FY15E 6,557 0.3% 739 11.3% 17.4%

FY16E 6,942 5.9% 781 11.2% 17.4%

FY17E 7,411 6.7% 844 11.4% 17.3%

Net profit (LC) EPS (LC) EPS growth (%) DPS (LC) BVPS (LC) Operating cash flow (LC mn) Free cash flow (LC mn) Interest cover (x) Net margin (%) Sales/assets (X) Debt/equity (%) Net debt/equity (%) ROE (%) Key model assumptions Sales growth PBT margin SGD/USD

532 0.17 -8.9% 0.15 0.68 624 467 430.7 8.1% 0.77 45.0% -20.0% 25.0% FY14A -1.4% 10.0% 1.27

544 0.18 2.7% 0.13 0.73 1,177 905 145.1 8.3% 0.78 42.4% -39.8% 24.7% FY15E 0.3% 10.1% 1.28

582 0.19 6.8% 0.14 0.78 692 405 153.3 8.4% 0.80 40.0% -36.5% 24.8% FY16E 5.9% 10.2% 1.28

638 0.21 9.7% 0.15 0.83 738 432 165.8 8.6% 0.83 37.6% -32.8% 25.6% FY17E 6.7% 10.5% 1.28

Downside risks to our view: Weaker-than-expected air travel demand resulting in airline capacity reductions and MRO demand, order book momentum stalls, increased bad debt provisions, wage pressure, volatile SGD/USD

Valuation and price target basis

Our Dec-15 price target of S$4.30 is based on our DDM valuation methodology, assuming a 75% dividend payout ratio, 5.6% cost of equity and 2.5% long-term growth. Our PT implies a P/E of 24x which is 1 standard deviation above its historical average valuation in the past 15 years, supported by ST Engineering's high orderbook. This is also supported by our sum-of-theparts valuation of S$4.50. P/E Trading Range Since Listing

30 +1 SD: 22.0x Mean: 19.1x

20

-1 SD: 16.1x

15 10

Current P/E: 20.00

+2 SD: 25.0x

25

-2 SD: 13.1x Apr-98 Sep-98 Feb-99 Jul-99 Dec-99 May-00 Oct -00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct -05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct -10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14

Key catalysts for the stock price: Order book of $12.5B (-5% y/y, -5% q/q) to support stronger growth. More contract wins, stronger USD, improved efficiency, industry M&A

12M Fwd P/E

Mean

-2 S.D.

-1 S.D.

+1 S.D.

+2 S.D.

Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis Sensitivity to 1% chg in Sales growth PBT margin SGD/USD

EBIT FY15E +/-3% na +/-1%

EPS FY15E +/-5% +/-8% +/-1%

Source: J.P. Morgan estimates.

JPMe change in estimates EPS (S$) JPMe old JPMe new % chg Consensus

FY15E 0.18 0.17 -3.2% 0.19

FY16E 0.20 0.19 -7.0% 0.21

FY16E 18.3 14.8 14.9 24.8 18.4

YTD Stock perf. 0.2 24.6 0.4 4.4 7.4

Source: Bloomberg, J.P. Morgan estimates.

Comparative metrics

SIA Engineering Korea Aerospace Industries HK Aircraft Engineering ST Engineering Sector Average

CMP LC 4.23 49,600 85.20 3.55

Mkt Cap $Mn 3,495 4,377 1,825 8,151

P/E (x) FY15E FY16E 23.5 20.1 32.5 25.9 17.1 13.1 20.3 19.0 23.1 19.2

P/BV (x) FY15E 3.7 4.1 2.0 4.9 3.6

FY16E 3.6 3.6 1.9 4.6 3.3

Source: Bloomberg, J.P. Morgan estimates. Prices are as of 26th February, 2015. *SIA Eng – based on FY16 and FY17 (year to March) data.

2

ROE FY15E 16.2 13.4 12.5 24.7 16.6

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

4Q14 Results Review 4Q results in-line with ours/market expectations 4Q14 net profit fell 16% y/y but rose 16% q/q to S$140MM, raising 2014 net profit to S$532MM, 8% lower y/y. Net profit margin was 7.6%, 1ppt lower y/y and steady q/q while 2014 net profit margin was 8.1%, 1ppt lower y/y. The Electronics division’s net profit rose 23% y/y and NP margin rose 3ppts y/y to 10% driven by favorable sales mix, lower operating costs and higher other income. The Marine division's net profit fell 7% y/y with NP margin 1ppt higher at 10% driven by lower ship repair and conversion activities and continued weaker performance from US operations. The Aerospace division's net profit fell 17% y/y with NP margin 1ppt lower y/y at 10%, driven by weaker performance of Aircraft Maintenance and Modification and Component/Engine Repair and Overhaul groups and restructuring costs and weaker performance of European operations. Land Systems division turned loss-making with NP margin down 8ppts y/y to negative 0.3% mainly driven by weaker performance of the Automotive (weaker specialty business in China) and Services and Trading divisions, higher allowance for specialty vehicles inventory and absence of disposal gains. Other segments' turned profitable which is positive. ROE was c.25%. End-Dec net cash was S$518.6MM or S$0.17/share (c.4.8% of current market cap). ST Engineering generated positive free cash flow of S$466.8MM, 31% lower y/y. Final DPS of S$0.04 and Special DPS of S$0.07 resulting in total 2014 DPS of S$0.15, steady y/y, implying a payout ratio of 88% and dividend yield of 4.3%. Order book continued to decline which is a concern ST Engineering’s order book fell 5% q/q, y/y to S$12.5B (vs S$13.2B in 3Q14) but still relatively high by historical standards with S$3.8B expected to be delivered in 2015. Some 60-70% of revenue is typically contributed by the order backlog. Management expects the group to achieve comparable revenue and PBT in 2015 vs 2014 with Aerospace and Land Systems divisions expected to report comparable revenue, Electronics division expected to report higher revenue and Marine division expected to report lower revenue in 2015 vs 2014. In terms of PBT, the Aerospace and Marine divisions are expected to report comparable PBT while the Electronics and Land Systems divisions are expected to report higher PBT in 2015 vs 2014. Key 4Q14 highlights Group revenue fell 5% y/y but rose 19% q/q as higher revenue in the Land Systems (+9% y/y, +18% q/q) division was offset by lower revenue in Aerospace (-6% y/y, +18% q/q), Electronics (-8% y/y, +36% q/q) and Marine (-11% y/y, -1% q/q) divisions. The others division’s revenue also fell (-11% y/y, +64% q/q).

3

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

2014 revenue breakdown by geographical area: Asia 57.8% (vs 58.3% in 2013), USA 23.3% (vs 25.7%), Europe 4.4% (vs 6.3%), Others 14.4% (vs 9.6%). Operating costs fell 2% y/y but rose 22% q/q. Operating profit fell 33% y/y, 9% q/q to S$130MM while EBIT margin slipped 3ppts y/y, 2ppts q/q to 7.1%. Tax charges fell 33% y/y, 31% q/q while the effective tax rate fell 3ppts y/y to 13%. Associates'/JVs profit rose 32% q/q to S$15MM compared to loss in 4Q13. 2014 net profit breakdown: Aerospace 41% (3ppts lower y/y), Electronics 29% (+5ppts), Land Systems 9% (-6ppts), Marine 20% (+1ppt), Others 0% (+3ppts). Aerospace division highlights ST Aerospace announced contracts amounting to S$310MM in 4Q14, 60% lower y/y and 31% lower q/q, mainly comprising of MBH contract, heavy maintenance contract for VIP division engine MRO contract and multiple engine wash contracts. New capabilities: -

Signed lease agreement with the City of Pensacola to establish satellite MRO facility

-

Acquired 100% equity interest in Aviation Academy of America, Inc to grow pilot training business

-

Set up new repair and overhaul capabilities in Singapore for UTC Aerospace Systems’ components to be installed on Boeing 787 aircraft

-

Completed Critical Design Review for A330-300P2F

2015 outlook: -

Set up Boeing 787 line and heavy maintenance capability in Singapore

-

Grow engine leasing business

-

Secure pilot training programmes for the US flight school

Electronics division highlights Electronics’ contracts announced totaled S$509MM, 14% lower y /y and 1% lower q/q in 4Q14, comprising of various transport solution projects in HK, Taiwan, Middle East and Latin America and overseas, satellite and broadband communications, and advanced electronics and ICT solutions. New capacity/capabilities:

4

-

Opening of Satellite Systems Centre in Singapore

-

New Cyber Security Centre spearheaded by I2R & STEE-InfoSec to defend Smart Nation Systems

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

-

Set up of subsidiary in Sao Paulo, Brazil

-

Formation of STEE-Enterprise 1 to act as a distributor/value-added reseller for one-stop enterprise system integration solutions

2015 Outlook: -

Sales recognition from the LTA’s Communications & Integrated Supervisory Control System, Bangkok and Philippines MRT projects

-

Sales recognition from communication system projects, the supply of telematics systems & satellite communication products

-

Sales recognition from the milestone completions of a simulator project & managed services sales

Land Systems division highlights Land Systems division secured contract worth S$100MM from SMRT Buses for MAN city buses, and contract from Brazilian Army for upgrade of Urutu 6x6 Armoured Personnel Carriers. New capabilities: -

Entered into strategic partnership with General Dynamics Ordnance and Tactical Systems to manufacture 40mm high velocity Air Burst ammunition locally for the US military market

-

Signed North American manufacturing licensing agreement with L-3 CPS for the InfiniDrive™ transmissions

2015 Outlook: -

Continue to pursue key defense programmes locally and overseas and deliver military products and services

-

Continue to work with partners to pursue high efficiency automotive drive solutions contracts from commercial and defence customers

Marine division highlights New capabilities: -

Secured order for two 130-foot Articulated Tug Barges (ATB) tugs for Bouchard Transportation Co., Inc

Deliveries/Milestone Completions: -

Delivered 3rd to 6th of six Anchor Handling Tug Supply Vessels for Swire Pacific Offshore Operations (Pte) Ltd; 2nd to 6th of ten Offshore Support Vessels (OSV) for Hornbeck Offshore Services, LLC; and 3rd of four Fast Missile Craft (FMC) for the Egyptian Navy

5

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

-

Launched Pasha Car Truck Carrier for Pasha Hawaii Shipping Co; keel laid for 1st of eight Littoral Mission Vessels (LMV) for the Republic of Singapore Navy; and naming for the 1st of four patrol vessels (PV) for the Royal Navy of Oman; Two 130-foot ATB for Bouchard Transportation

-

Delivered various ship repair and upgrading projects

2015 outlook: -

Expect to launch 1st of eight LMVs and 4th of four PVs

-

Expect to deliver 1st of four PVs, 7th to 10th of ten OSVs, 4th of four FMC, Pasha Car Truck Carrier, “Marjorie C”, TAGS-66 Oceanographic Survey Ship and 1st of two ATBs

Trimming estimates; stay OW as long-term outlook remains positive We have trimmed our FY15-16E EPS estimates, mainly to factor in lower profits for the Aerospace segment and introduced our FY17E forecasts. Our Dec-15 price target of S$4.30 is based on our DDM valuation methodology, assuming a 75% dividend payout ratio, 5.6% cost of equity and 2.5% long-term growth. Our PT implies a P/E of 24x which is 1 standard deviation above its historical average valuation in the past 15 years, supported by ST Engineering's high orderbook. This is also supported by our sum-of-the-parts valuation of S$4.50. ST Engg’s valuations are looking more attractive (32% below peak even though its order book remains high) given its higher profitability (ROE 25% in 2015E). Key catalysts: 1) order book of $12.5B (-5% y/y, -5% q/q) should support stronger growth, 2) more contract wins, 3) stronger USD, 4) improved efficiency and 5) industry M&A. Key downside risks: 1) weaker-than-expected air travel demand resulting in airline capacity reductions and MRO demand, 2) order book momentum stalls, 3) increased bad debt provisions, 4) wage pressure and 5) volatile SGD/USD.

6

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

Table 1: 4Q14 & 2014 Results at a glance (Consolidated) S$ in millions Revenue COGS Gross profit Margin SG&A Other operating income/(exp) EBIT Margin Interest income/(exp) Other non-operating gains/(exp) Share of associates/JV profit Associates/JC contribution to PBT Profit before tax Margin Tax Effective tax rate Profit after tax Minority interest Net profit Margin EPS (reported)

4Q14 1,848 (1,530) 318 17.2% (165) (23) 130 7.1% 9 12 15 9.2% 167 9.1% (22) 13.1% 145 (5) 140 7.6% 4.48

4Q13 1,941 (1,547) 395 20.3% (167) (33) 194 10.0% 2 15 (4) -1.8% 208 10.7% (32) 15.6% 175 (8) 168 8.6% 5.37

Y/Y Chg -5% -1% -19% -3.1ppt -1% -32% -33% -3.0ppt 265% -16% nm 11.0ppt -20% -1.7ppt -33% -2.5ppt -17% -34% -16% -1.0ppt -17%

3Q14 1,553 (1,220) 333 21.5% (155) (35) 143 9.2% (8) 5 12 7.7% 152 9.8% (32) 20.8% 120 1 121 7.8% 3.89

Q/Q Chg 19% 25% -4% -4.2ppt 7% -36% -9% -2.1ppt nm 165% 32% 1.5ppt 10% -0.7ppt -31% -7.7ppt 21% nm 16% -0.2ppt 15%

2014 6,539 (5,221) 1,318 20.2% (648) (116) 555 8.5% (2) 40 57 8.8% 651 10.0% (114) 17.5% 537 (5) 532 8.1% 17.04

2013 6,633 (5,201) 1,432 21.6% (643) (116) 673 10.1% (9) 34 23 3.2% 722 10.9% (130) 18.0% 592 (11) 581 8.8% 18.67

Y/Y Chg -1% 0% -8% -1.4ppt 1% -1% -18% -1.7ppt -81% 18% 150% 5.6ppt -10% -0.9ppt -13% -0.5ppt -9% -53% -8% -0.6ppt -9%

Source: J.P. Morgan, Company data.

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Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Table 2: 4Q14 & 2014 Results at a glance (Segment breakdown) S$ in millions Revenue Aerospace Electronics Land systems Marine Others

1Q13 1,545 476 424 346 254 45

2Q13 1,597 506 354 392 311 34

3Q13 1,550 510 350 348 296 46

4Q13 1,941 587 522 389 377 66

1Q14 1,552 501 369 325 323 34

2Q14 1,586 537 380 293 348 28

3Q14 1,553 470 354 357 336 36

4Q14 1,848 553 480 422 334 59

Y/Y -4.8% -5.8% -8.0% 8.5% -11.4% -10.6%

Q/Q 19.0% 17.7% 35.6% 18.2% -0.6% 63.9%

2013 6,633 2,079 1,650 1,475 1,238 191

2014 6,539 2,061 1,583 1,397 1,341 157

Y/Y -1.4% -0.9% -4.1% -5.3% 8.3% -17.8%

Revenue Contribution Aerospace Electronics Land systems Marine Others

100% 31% 27% 22% 16% 3%

100% 32% 22% 25% 19% 2%

100% 33% 23% 22% 19% 3%

100% 30% 27% 20% 19% 3%

100% 32% 24% 21% 21% 2%

100% 34% 24% 18% 22% 2%

100% 30% 23% 23% 22% 2%

100% 30% 26% 23% 18% 3%

0.0ppt -0.3ppt -0.9ppt 2.8ppt -1.3ppt -0.2ppt

0.0ppt -0.3ppt 3.2ppt -0.2ppt -3.6ppt 0.9ppt

100% 31% 25% 22% 19% 3%

100% 32% 24% 21% 21% 2%

0.0ppt 0.2ppt -0.7ppt -0.9ppt 1.8ppt -0.5ppt

159 72 33 21 30 2

189 82 47 34 36 (10)

168 79 43 18 34 (5)

214 86 47 39 47 (5)

168 75 32 19 32 11

164 73 48 18 25 (0)

152 64 47 18 33 (10)

167 72 57 1 34 4

-21.7% -16.6% 21.0% -97.2% -27.9% nm

10.3% 13.2% 20.2% -93.9% 3.7% nm

730 319 170 112 146 (18)

651 283 184 56 123 5

-10.8% -11.4% 8.0% -49.7% -16.1% nm

100% 46% 21% 13% 19% 2%

100% 43% 25% 18% 19% -5%

100% 47% 26% 10% 20% -3%

100% 40% 22% 18% 22% -3%

100% 44% 19% 11% 19% 6%

100% 45% 29% 11% 15% 0%

100% 42% 31% 12% 22% -6%

100% 43% 34% 1% 20% 2%

0.0ppt 2.6ppt 11.9ppt -17.7ppt -1.7ppt 4.9ppt

0.0ppt 1.1ppt 2.8ppt -11.3ppt -1.3ppt 8.7ppt

100% 44% 23% 15% 20% -2%

100% 43% 28% 9% 19% 1%

0.0ppt -0.3ppt 4.9ppt -6.7ppt -1.2ppt 3.2ppt

PBT Margin Aerospace Electronics Land systems Marine Others

10% 15% 8% 6% 12% 5%

12% 16% 13% 9% 11% -30%

11% 15% 12% 5% 11% -11%

11% 15% 9% 10% 12% -8%

11% 15% 9% 6% 10% 31%

10% 14% 13% 6% 7% -1%

10% 14% 13% 5% 10% -27%

9% 13% 12% 0% 10% 7%

-2.0ppt -1.7ppt 2.8ppt -9.8ppt -2.3ppt 15.0ppt

-0.7ppt -0.5ppt -1.5ppt -4.8ppt 0.4ppt 33.4ppt

11% 15% 10% 8% 12% -9%

10% 14% 12% 4% 9% 3%

-1.0ppt -1.6ppt 1.3ppt -3.6ppt -2.7ppt 12.5ppt

Net Profit Aerospace Electronics Land systems Marine Others

134 60 29 21 21 2

148 65 37 26 29 (10)

131 64 32 15 26 (5)

168 70 39 29 35 (5)

137 60 29 17 25 6

133 55 39 19 21 (1)

121 46 37 16 30 (8)

140 58 47 (1) 32 4

-16.3% -16.8% 23.0% nm -6.6% nm

15.6% 24.7% 28.3% nm 8.9% nm

581 259 137 91 110 (17)

532 220 152 50 108 1

-8.4% -15.1% 11.0% -44.8% -1.7% nm

100% 45% 22% 16% 16% 2%

100% 44% 25% 18% 19% -6%

100% 49% 25% 11% 20% -4%

100% 42% 23% 17% 21% -3%

100% 44% 21% 12% 18% 5%

100% 42% 29% 14% 16% -1%

100% 38% 30% 13% 25% -6%

100% 41% 34% -1% 23% 3%

0.0ppt -0.3ppt 10.8ppt -18.3ppt 2.4ppt 5.4ppt

0.0ppt 3.0ppt 3.3ppt -14.0ppt -1.4ppt 9.0ppt

100% 45% 24% 16% 19% -3%

100% 41% 29% 9% 20% 0%

0.0ppt -3.2ppt 5.0ppt -6.2ppt 1.4ppt 3.1ppt

9% 13% 7% 6% 8% 5%

9% 13% 10% 7% 9% -28%

8% 13% 9% 4% 9% -11%

9% 12% 7% 8% 9% -7%

9% 12% 8% 5% 8% 19%

8% 10% 10% 7% 6% -5%

8% 10% 10% 4% 9% -21%

8% 10% 10% 0% 10% 6%

-1.0ppt -1.4ppt 2.5ppt -7.8ppt 0.5ppt 13.4ppt

-0.2ppt 0.6ppt -0.6ppt -4.7ppt 0.8ppt 27.8ppt

9% 12% 8% 6% 9% -9%

8% 11% 10% 4% 8% 1%

-0.6ppt -1.8ppt 1.3ppt -2.6ppt -0.8ppt 9.5ppt

Profit before tax Aerospace Electronics Land systems Marine Others PBT Contribution Aerospace Electronics Land systems Marine Others

Net Profit Contribution Aerospace Electronics Land systems Marine Others Net Margin Aerospace Electronics Land systems Marine Others

Source: J.P. Morgan, Company data.

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Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 1: Aerospace margin trend

20%

18%

17% 17%

16% 15% 15% 15% 15% 14% 15% 14% 14% 13% 15% 13% 14% 14% 13% 13% 13% 13% 13% 12% 12% 13% 12% 11% 12% 11% 10% 10% 10% 10% 10%

PBT margin

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

0%

1Q11

5%

Net margin

Source: J.P. Morgan, Company data.

Figure 2: Electronics margin trend

PBT margin

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

16% 13% 13% 13% 14% 12% 12% 12% 12% 12% 11% 10% 12% 10% 10% 10% 9%9% 9% 9% 9% 8% 9% 10% 8% 8% 8% 7% 8% 7% 7% 7% 7% 8% 6% 6% 6% 6% 4% 2% 0%

Net margin

Source: J.P. Morgan, Company data.

9

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 3: Land Systems margin trend

12% 10%

9%

8% 7% 6% 6%

6%

4%

8%

7% 6% 7%

5% 4%

9%

8% 6%

7% 6%6%

5%

10%

9% 7%

4%

5%

4%

8% 6% 7% 6% 5% 5% 4%

2%

0%

0%

PBT margin

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

0% 1Q11

-2%

Net margin

Source: J.P. Morgan, Company data.

Figure 4: Marine margin trend

41% 34%

PBT margin Source: J.P. Morgan, Company data.

10

Net margin

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

4Q11

3Q11

2Q11

1Q12

14% 12% 11% 13% 12% 11% 11% 12% 10% 10% 10% 11% 8% 10% 9% 9% 9% 8% 7% 6% 9% 10% 9% 8%

12% 9% 11% 9% 7% 8% 1Q11

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Table 3: ST Engineering Orders Contracted Since 2013 Date

Contract Value (S$MM)

Client Name

Completion Date

Details

ST Aerospace 15-Jan-13

NA

Royal Air Force of Oman (RAFO)

1Q 2014

1Q13 Total

480

NA

NA

18-Jun-13

NA

Qatar Airways

2018

18-Jun-13

NA

UTC Aerospace System

NA

18-Jun-13

32

Spring Airlines

2021

2Q13 Total

430

NA

NA

3-Jul-13

NA

UTC Aerospace System

NA

3Q13 Total

600

NA

NA

28-Oct-13

NA

Jetstar Asia

NA

4Q13 Total

780

NA

NA

10-Feb-14

NA

SF Airlines

NA

1Q14

460

NA

NA

9-Apr-14

NA

NA

2016

9-Apr-14 14-Jul-14

NA NA

Aircalin, New Caledonia NA

3Q 2014 2019

2Q14

520

NA

NA

NA

NA

4Q 2016

450

NA

NA

310

NA

NA

Full scale maintenance and modernisation solution for three of its C130 Hercules aircraft. ST Aerospace will undertake both modernisation and maintenance work at its facility in Paya Lebar, Singapore Airframe, component and engine maintenance, as well as engineering and development Five-year Multi-crew Pilot License (MPL) training contract by Qatar Airways Long-term repair license agreement for maintenance, repair and overhaul (MRO) services for UTC Aerospace Systems components on the Boeing 787 aircraft. Component Maintenance-By-the-Hour (MBH) contract for 22 of Spring Airlines Japan’s Boeing 737-800 Airframe, component and engine maintenance, as well as VIP interior modifications. Maintenance, repair and overhaul (MRO) services on the Boeing 787 Dreamliner nacelle systems for both the Rolls-Royce Trent 1000 and General Electric GEnx engines. Airframe, component and engine maintenance, to commercial airline cabin retrofit and freighter conversions. ST Aerospace and Jetstar Asia jointly announced the signing of a three-year line maintenance contract. The agreement covers a full suite of line maintenance support for Jetstar Asia’s existing and future fleet of Airbus A320 aircraft. Airframe, component and engine maintenance, to cabin reconfiguration and engine wash. ST Aerospace and SF Airlines have signed a contract for five 757200SF passenger-to-freighter (PTF) conversions, with an option for three more aircraft. The new 757-200SF freighters will have a 15pallet cargo configuration. Airframe, component and engine maintenance, to cabin reconfiguration and engine wash. Two-year agreement with a major airline for heavy maintenance of 20 Embraer E-190 aircraft at the aerospace sector’s San Antonio facility C-level checks on three Airbus A320 and A330 aircraft. Five-year agreement with a regional US airline for heavy maintenance of 42 Embraer E-170 and E-175 aircraft at the aerospace sector’s San Antonio facility. Airframe, component and engine maintenance, freighter conversion, cabin modification, engine wash and pilot training Nose-to-tail cabin completion contract for a wide-body VIP aircraft, from an undisclosed customer. Airframe, component and engine maintenance, freighter conversion, cabin modification, engine wash and pilot training. Airframe, component and engine maintenance, VIP completions and engine wash.

13-Aug-14 3Q14 4Q14

11

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

ST Electronics 1Q13

NA

Benima Engineering Snd Bh

Aug, 2013

1Q13

NA

Hartasuma Sdn Bhd

2014

1Q13

NA

Marubeni Corporation

2015

Jan, 2013

NA

2020

6-Feb-13

31

2017

Mass rapid transit (MRT) project in Kuala Lumpur, Malaysia.

1Q13

NA

Bombardier Transportation North America (BTNA) MRT Corporation Sdn Bhd (MRT Corp) LTA

Implement a Maintenance System for the Keretapi Tanah Melayu Berhad's Seremban Depot Implement a Passenger Information System for the Kelana Jaya Line. Airport Access MRT System as well as an On-Train Information Display System for the Taoyuan International Airport MRT Line, and electrical & mechanical engineering solutions for the XinyiSongshan Line. Provide a fully digital trainborne Passenger Information System.

2016

1Q13

78

NA

NA

1Q13

8

NA

NA

1Q13 Total

151

NA

NA

2Q13 2Q13

25 182

LTA NA

2016 NA

2Q13 Total

207

NA

NA

3Q13

238

NA

NA

3Q13

178

NA

NA

Update, test and commission for the Land Transport Authority, the Maintenance Management System for the North-East Line. Supply of products and network infrastructure including Agilis Very Small Aperture Terminal (VSAT) and earth station equipment, iDirect satellite hubs and routers for e-Government, cellular backhaul and maritime VSAT solutions. Implement and support a Customer Information System and an Advanced Metering Infrastructure solution Rail electronics, satellite communications (satcom) and smart utility projects Rail electronics contracts Supply of satcoms solutions and communications systems projects to local and international customers Rail electronics, satellite communications (satcoms) and communications projects Communications and electronics systems, advanced Information Technologies (IT) and rail electronics solutions. Supply of satcoms solutions and communications systems projects to local and international customers

3Q13 Total 4Q13

416 353

NA NA

NA NA

4Q13

116

Etisalat, SimbaNET and Elara Comunicaciones

NA

4Q13

124

NA

2017

4Q13 Total 6-Feb-14

593 6

NA Singapore Armed Forces (SAF)

NA 2015

14-Apr-14

38

14-Apr-14

68

LTA

14-Apr-14 14-Apr-14

48 427

ST Teleport

16-Jul-14 16-Jul-14 16-Jul-14 12

272 93 221

Dec, 2016

2015

NA

NA

NA NA

NA NA

Integrated security management systems, systems integration, operational and maintenance support and services, network infrastructure solutions, integrated communications, smart utilities solutions and cyber security solutions for government as well as private enterprises. Satcom networks and radio frequency products from satcom operators such as Etisalat in the Gulf, SimbaNET from Nigeria and Elara Comunicaciones from Mexico. The company's solutions serve to enhance its customers’ broadband infrastructure, resulting in improvements in higher throughput and more efficient services for governments, oil-and-gas exploration and other social and enterprise network providers. Road traffic and rail electronics solutions including support, enhancement and enforcement systems. Supply a Vehicular Integrated Communication System (VICS) for the SAF’s combat vehicles. Rail electronics contracts for communications, automatic fare collection, maintenance management and other systems. These include the 4G LTE (Long Term Evolution) upgrade for Singapore’s Downtown Line; platform screen doors for Kaohsiung, Taiwan’s Red Line; a Passenger Information System for Metro Rio Line 4 in Brazil and other cities in Asia. Provide an Intelligent Bus Management System to manage Singapore’s entire public bus fleet. Set up their new satellite teleport facility in Singapore. Security solutions for government institutions of higher learning, systems integration and maintenance services, as well as the development and supply of specialised electronics systems for both public and private agencies. Traffic management maintenance and services for roads; and rail electronics systems such as communications and control, commercial radio, access and maintenance management Satcom networks and, Very Small Aperture Terminals Facility management, operations and support services, and others

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

16-Oct-14 16-Oct-14 16-Oct-14

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

General Dynamics Ordnance and Tactical Systems and US Army Science Applications International Corporation

NA

A number of armed forces for its 40mm ammunition solutions

NA

Science Applications International Corporation has selected the Kinetics’ InfiniDrive™ HMX3000 transmission for its upgraded tracked military vehicle solutions. Supply of 40 MAN A24 articulated buses and 332 MAN A22 12metre bus

101 117 295

15-Jan-15

113

15-Jan-15

83

15-Jan-15

313

for both public and private sector customers. Platform screen doors, signalling installation and digital communication network sub-contract works for GE Transportation for Singapore Thomson-East Coast Line as well as other systems and maintenance projects for Malaysia’s Ampang Line, Wuhan MRT Line 4 in China and a Passenger Information System for an Indian rail project in New Delhi. Delivering wide range of iDirect and Agilis range of satcom products and solutions to governments, security, enterprises, oil and gas and maritime users worldwide. Integrated security systems for various premises and facilities in Singapore and the region as well as a contract to supply secured Location Based Services products for an overseas customer. Platform screen doors, passenger information systems, integrated monitoring and surveillance systems as well as other land transport solutions from local and overseas customers in Hong Kong, Taiwan, the Middle East and Latin America. Orders from companies and government agencies for satellite communication equipment, network equipment and earth stations. Advanced Electronics & ICT contracts received from both public and private sectors.

NA

ST Kinetics 22-Oct-13

38

12-Feb-14

NA

2-May-14

100

SMRT

2016

ST Marine 30-Jan-13

NA

Ministry of Defence (MINDEF)

2016 onwards

15-Feb-13

125

2015

21-Mar-13

125

NA

Build an Articulated Tug Barge (ATB) unit.

26-Nov-13

420

Bouchard Transportation Co., Inc. (Bouchard) Bouchard Transportation Co., Inc. (Bouchard) Crowley Maritime Corporation (Crowley)

Design and build of eight new vessels. ST Electronics will supply the core combat systems and combat system integration solutions while ST Marine will carry out the platform system integration as the lead system integrator. Build an Articulated Tug Barge (ATB) unit.

2017

4Q13

446

NA

NA

3Q14

NA

Bouchard Transportation Co., Inc. (Bouchard)

2016

US Shipyard, VT Halter Marine, Inc (VT Halter Marine) won a shipbuilding contract from Crowley Maritime Corporation (Crowley) to build two Container Roll-on/Roll-off (ConRo) vessels. Logistics management, maintenance, major upgrade and conversion projects, which will be carried out in the Singapore yards. Build two 130-foot Articulated Tug Barges (ATB) tugs

Source: Company reports.

13

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

Table 4: ST Engineering Associates & Jointly Controlled Entities Company Name Associates Airbus Helicopters Southeast Asia Private Limited CJS Aviation Pte Ltd Composite Technology International Pte Ltd Elbe Flugzeugwerke GmbH Madrid Aerospace Services S.L. Shanghai Technologies Aerospace Company Limited ST Aerospace (Guangzhou) Aviation Services Company Limited Singapore Precision Repair and Overhaul Pte Ltd Turbine Coating Services Pte Ltd Turbine Overhaul Services Pte Ltd iWOW Technology Pte Ltd NEC STEE Cloud Services Pte. Ltd. WizVision Pte. Ltd. CityCab Pte Ltd GFM Maquinaria, S.A.P.I. de C.V. Timoney Holdings Limited NanoScience Innovation Pte Ltd Experia Events Pte. Ltd. Singapore Airshow & Events Pte. Ltd. Jointly Controlled Entities Total Engine Asset Management Pte. Ltd. WingStar Pte. Ltd GFM Electronics S.A. de C.V.

ST Electronics (Satellite Systems) Pte. Ltd. ATREC Pte. Ltd. Beijing Zhonghuan Kinetics Heavy Vehicles Co., Ltd. Takata CPI Singapore Pte Ltd First Response Marine Pte. Ltd. Fortis Marine Solutions Pte. Ltd. Halter-Bollinger Joint Venture, L.L.C. Joint Shipyard Management Services Pte Ltd Nova Star Cruises Limited Source: Company reports.

14

Principal activities

Country of incorporation/pl ace of business

2013 effective equity interest

Selling, maintaining and overhauling of helicopters

Singapore

25.0%

Provision of scheduled premium class jet services Repairing and rebuilding helicopter rotor blades Conversion of used Airbus passenger aircraft to freighter as well as the production of aircraft components and equipment, including supply for Airbus production of new and converted aircraft Repair and overhaul of aircraft landing gears and its related components Aircraft and component maintenance, repair, overhaul and other related maintenance business Aircraft and component maintenance, repair, overhaul and other related maintenance business Repair and overhaul of aircraft and helicopter landing gears and its related components Repair, refurbishment and upgrading of aircraft jet engine turbine blades and vanes Repair and service of gas and steam turbine components To carry out research and experimental development on IT R&D, consultancy services on telecommunication software and manufacture of wireless communications equipment, wireless communications devices and equipment manufacturing Providing Software as a Service (SaaS) to both public and private institutions in Singapore, and subsequently to other ASEAN countries Providing information technology services and trading of computer accessories Rental of taxis and provision of premier bus service, charge card facilities and travel related services Sale of construction and mining machinery and equipment Design and prototyping services and component supply for the automotive and aerospace engineering sectors Research and development of ultra fine structure, especially nano-scale, materials, devices, equipment and intellectual properties Organising and management of conferences, exhibitions and other related activities, including the biennial Singapore Airshow event Dormant

Singapore Singapore Germany

26.0% 33.3% 35.0%

Spain China

50.0% 49.0%

China

49.0%

Singapore Singapore Singapore Singapore

50.0% 24.5% 49.0% 17.2%

Singapore

40.0%

Singapore Singapore

22.8% 46.5%

Mexico Ireland

40.0% 27.7%

Singapore

21.6%

Singapore

33.0%

Singapore

33.0%

Leasing of engines Acquisition, ownership and management of aircraft Design and implementation, distribution and sales of high technology systems, services and products, in the communications area, as well as electronics systems, principally closed circuits and alarms for airports, malls, stadiums and highways. Management of reusable electronic equipment and components Design and development, system integration, manufacturing and sale of satellite equipment Research and technology development in advanced materials for both defence and commercial applications Develop, manufacture and sale of specialised heavy vehicles and sale of related spare parts and provision of relevant technical consultancy and after sale technical support services Manufacture of pyrotechnic components for seatbelts and air bags used in motor vehicles Ship and boat leasing with operator (including chartering) To provide design and systems engineering services and maintenance of specialised naval vessels To bid and secure US boat fabrication contracts for its shareholders Construction and managing workers’ dormitories Provision of ferry services

Singapore Singapore Mexico

50.0% 50.0% 50.0%

Singapore

51.0%

Singapore

50.0%

China

50.0%

Singapore Singapore Singapore

49.0% 50.0% 51.0%

USA Singapore Canada

50.0% 30.0% 10.0%

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 5: Aerospace quarterly contracts announced S$ in millions

All maintenance including airframe, 780 component and engine

900 800 700

Airframe heavy maintenance

600

540 453

500 400

370

450

480

520 460

430

450

370

350

320 320

600

590

310

260

300

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

200

Source: J.P. Morgan, company data.

Figure 6: Electronics quarterly contracts announced S$ in millions

700

593

600

581

580 513

500

509

416

400 300 200 100

210 100

166

192

151

207

0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: J.P. Morgan, company data.

15

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 7: Net order book trend S$ in billions

13.4 13.4 13.0 13.2 12.712.5 12.712.513.2 12.5 12.312.2 12.1

14.0 13.0 11.811.8

12.0 11.0 10.0

11.511.3 10.8 10.811.0

11.0 10.6 10.7 10.310.3 9.5

9.0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

8.0

Source: J.P. Morgan, company data.

Figure 8: Singapore Defense Expenditure S$ MM

14,000 12,000 10,000 8,000 6,000 4,000 2,000 -

12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

Singapore Defense Expenditure (S$ MM) Source: Singapore Ministry of Defense. Note: Data is for financial year ending March.

16

Y/Y Change

2015E

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

0.0%

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

Figure 9: US Defense Expenditure US$ MM

1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 -

20.0% 15.0% 10.0% 5.0% 0.0% -5.0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

-10.0%

US Defense Expenditure (US$ MM)

Y/Y Change

Source: World Bank and US Census Bureau.

Figure 10: Global Defense Expenditure US$ MM

Source: Stockholm International Peace Research Institute (SIPRI).

17

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 11: ST Engineering Defense Revenue as % of Singapore Defense Expenditure

25% 20%

19.7%

18.3%

17.1%

16.5%

2005

2006

15.1%

15%

17.4%

16.8%

2008

2009

23.4%

21.3%

2011

2012

20.0%

20.6%

2013

2014

10% 5% 0% 2004

2007

2010

ST Engineering Defense Revenue as % of Singapore Defense Expenditure Source: Singapore Ministry Of Defense and company reports. .Note: Data is for financial year ending March.

Figure 12: STE vs SIE vs HAECO vs KAI EPS Growth Comparison

STE

SIE

HAECO

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

100% 80% 60% 40% 20% 0% -20% -40% -60% -80% KAI

Source: Company reports. Note: KAI was loss making in 2005-06 and turned profitable in 2007 which makes EPS growth in 2005-07 not meaningful.

Table 5: ST Engineering: 2015-17 Earnings Estimate Revisions Year to March Net profit (S$MM) EPS (S$) Source: J.P. Morgan estimates.

18

2015E 565 0.18

Old 2016E 628 0.20

2017E -

2015E 544 0.18

New 2016E 582 0.19

2017E 638 0.21

2015E -3.6% -3.2%

% chg 2016E -7.3% -7.0%

2017E -

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Figure 13: ST Engineering P/E Trading Range Since 1998 (x)

30 +1 SD: 22.0x Mean: 19.1x

20

-1 SD: 16.1x

15

-2 SD: 13.1x Apr-98 Sep-98 Feb-99 Jul-99 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14

10

Current P/E: 20.00

+2 SD: 25.0x

25

12M Fwd P/E

Mean

-2 S.D.

-1 S.D.

+1 S.D.

+2 S.D.

Source: J.P. Morgan estimates, Company data, Bloomberg.

Figure 14: ST Engineering P/B Trading Range Since 1998 (x)

10

Current P/B: 5.1x

+2 SD: 7.7x

8

+1 SD: 6.6x Mean: 5.5x

6

-1 SD: 4.4x -2 SD: 3.3x

2

Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15

4

12M Trailing P/BV

Mean

-2 S.D.

-1 S.D.

+1 S.D.

+2 S.D.

Source: J.P. Morgan estimates, Company data, Bloomberg.

19

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

Investment Thesis, Valuation and Risks ST Engineering (Overweight; Price Target: S$4.30) Investment Thesis We remain buyers as ST Eng's valuations are attractive (32% below peak even though its order book remains high) given its higher profitability (ROE 25% in 2015E). Key catalysts: 1) orderbook of $12.5B (-5% y/y, -5% q/q) still relatively high by historical standards, 2) lower fuel prices should help boost aircraft utilization and MRO demand, 3) more contract wins, 4) stronger USD, 5) improving operating efficiency, 6) industry M&A. Valuation Our Dec-15 price target of S$4.30 is based on our DDM valuation methodology, assuming a 75% dividend payout ratio, 5.6% cost of equity and 2.5% long-term growth. Our PT implies a P/E of 24x which is 1 standard deviation above its historical average valuation in the past 15 years, supported by ST Engineering's high orderbook. This is also supported by our sum-of-the-parts valuation of S$4.50. Risks to Rating and Price Target Key downside risks: 1) weaker-than-expected air travel demand resulting in airline capacity reductions and MRO demand, 2) order book momentum stalls, 3) increased bad debt provisions, 4) wage pressure and 5) volatile SGD/USD.

20

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

ST Engineering: Summary of Financials Income Statement S$ in millions, year end Dec Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y

Cash flow statement FY13 FY14 FY15E FY16E FY17E S$ in millions, year end Dec 6,633 6,539 6,557 6,942 7,411 EBIT 4.0% (1.4%) 0.3% 5.9% 6.7% Depr. & amortization 800 709 739 781 844 Change in working capital 2.4% (11.4%) 4.2% 5.7% 8.1% Taxes 673 555 573 613 673 Cash flow from operations 2.3% (17.6%) 3.2% 6.9% 9.9% 10.1% 8.5% 8.7% 8.8% 9.1% Capex (9) (2) (5) (5) (5) Disposal/(purchase) 730 651 665 711 779 Net Interest 2.0% (10.8%) 2.3% 6.8% 9.5% Other (138) (114) (116) (124) (135) Free cash flow 18.9% 17.5% 17.4% 17.4% 17.3% 581 532 544 582 638 Equity raised/(repaid) 0.8% (8.4%) 2.3% 6.8% 9.7% Debt raised/(repaid) 3,101 3,118 3,109 3,109 3,109 Other 0.19 0.17 0.18 0.19 0.21 Dividends paid (0.2%) (8.9%) 2.7% 6.8% 9.7% Beginning cash Ending cash DPS Ratio Analysis FY13 FY14 FY15E FY16E FY17E S$ in millions, year end Dec 1,930 1,471 1,973 1,947 1,907 EBITDA margin 1,222 1,319 1,117 1,183 1,263 Operating margin 1,808 1,802 1,611 1,706 1,821 Net margin 802 734 734 734 734 5,761 5,326 5,436 5,570 5,725 Sales per share growth 166 127 127 127 127 Sales growth 1,520 1,578 1,678 1,791 1,921 Net profit growth 8,707 8,319 8,529 8,777 9,061 EPS growth

Balance sheet S$ in millions, year end Dec Cash and cash equivalents Accounts receivable Inventories Others Current assets . LT investments Net fixed assets Total Assets . Liabilities Short-term loans 434 75 Payables 1,605 1,667 Others 2,055 1,974 Total current liabilities 4,094 3,716 . Long-term debt 939 944 Other liabilities 1,414 1,395 Total Liabilities 6,447 6,055 Shareholder's equity 2,260 2,265 BVPS (S$) 0.68 0.68 Source: Company reports and J.P. Morgan estimates.

75 1,741 1,974 3,790

75 1,843 1,974 3,892

944 1,395 6,129 2,401 0.73

944 1,395 6,231 2,546 0.78

Interest coverage (x) 75 1,968 Net debt to equity 1,974 Sales/assets 4,016 Assets/equity ROE 944 ROCE 1,395 6,355 2,706 0.83

FY13 673 127 1,886 930

FY14 555 154 1,539 624

FY15E 573 166 466 1,177

FY16E 613 168 (58) 692

FY17E 673 171 (71) 738

(282) 10 (9) 14 672

(224) 5 (2) 62 467

(276) 5 (5) 0 905

(292) 5 (5) 0 405

(310) 5 (5) 0 432

52 29 (30) (521) 1,712 1,930 0.15

17 (392) (52) (499) 1,930 1,471 0.15

0 0 0 (408) 1,471 1,973 0.13

0 0 0 (436) 1,973 1,947 0.14

0 0 0 (478) 1,947 1,907 0.15

FY13 12.1% 10.1% 8.8%

FY14 10.8% 8.5% 8.1%

FY15E 11.3% 8.7% 8.3%

FY16E 11.2% 8.8% 8.4%

FY17E 11.4% 9.1% 8.6%

3.0% 4.0% 0.8% (0.2%)

(2.0%) (1.4%) (8.4%) (8.9%)

0.6% 0.3% 2.3% 2.7%

5.9% 5.9% 6.8% 6.8%

6.7% 6.7% 9.7% 9.7%

91.0

430.7

145.1

153.3

165.8

(24.7%) (20.0%) (39.8%) (36.5%) (32.8%) 0.8 0.8 0.8 0.8 0.8 417.3% 400.8% 382.9% 369.6% 357.7% 29.0% 25.0% 24.7% 24.8% 25.6% 16.4% 13.8% 14.7% 15.1% 15.9%

21

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

JPM Q-Profile Singapore Technologies Engineering Ltd (SINGAPORE / Industrials) As Of: 20-Feb-2015

[email protected]

Local Share Price

Current:

3.44

12 Mth Forward EPS

Current:

0.19

0.25

5.00 4.50

0.20

4.00 3.50

0.15

3.00 2.50 2.00

0.10

1.50 1.00

0.05

0.50

PE (1Yr Forward)

17.9x

30.0x

P/E Relative to Singapore Index

Jan/14

Current:

Sep/14

May/13

Jan/12

Sep/12

May/11

Jan/10

Sep/10

May/09

Jan/08

Sep/08

May/07

Jan/06

Sep/06

May/05

Jan/04

Sep/04

May/03

Jan/02

Sep/02

May/01

Jan/00

0.00 Sep/00

Jan/15

Jul/13

Current:

Apr/14

Oct/12

Jan/12

Jul/10

Apr/11

Oct/09

Jan/09

Jul/07

Apr/08

Oct/06

Jan/06

Jul/04

Apr/05

Oct/03

Jan/03

Jul/01

Apr/02

Oct/00

Jan/00

0.00

1.31

2.50

25.0x

2.00

20.0x 1.50 15.0x 1.00 10.0x 0.50

5.0x

ROE (Trailing)

Current:

28.84

40.00

Sep/14

Jan/14

May/13

Sep/12

Jan/12

May/11

Sep/10

Jan/10

May/09

Sep/08

Jan/08

May/07

Sep/06

Jan/06

May/05

Sep/04

Jan/04

Sep/02

Jan/02

May/03

Price/Book (Value)

Current:

12.0x

P/B Trailing

Sep/14

Jan/14

May/13

Sep/12

Jan/12

May/11

Sep/10

Jan/10

May/09

Sep/08

Jan/08

May/07

Jan/06

Sep/06

May/05

Jan/04

Sep/04

Sep/02

May/03

Jan/00

Sep/14

Jan/14

May/13

Sep/12

Jan/12

May/11

Sep/10

Jan/10

Sep/08

May/09

Jan/08

May/07

Jan/06

0.0

Sep/06

1.0

0% May/05

2.0

1% Sep/04

3.0

2%

Jan/04

4.0

3%

Sep/02

5.0

4%

May/03

6.0

5%

Jan/02

2.38

8.0 7.0

May/01

Current:

9.0

6%

Jan/00

Sep/00

Dividend Yield (Trailing)

7%

Sep/00

May/01

Sep/14

Jan/14

Jan/12

May/13

6%

Jan/02

8%

Current:

Singapore BY

Sep/00

12Mth fwd EY Proxy

May/01

9%

Sep/12

May/11

Jan/10

Sep/10

Sep/08

May/09

Jan/08

May/07

Jan/06

Sep/06

Sep/04

May/05

Jan/04

Sep/02

May/03

Jan/02

May/01

Jan/00

Sep/00

Earnings Yield (& Local Bond Yield)

Jan/00

0.00

0.0x

5.5x

P/B Forward

35.00 10.0x

30.00 25.00

8.0x

20.00

6.0x

15.00 4.0x

10.00 5.00

2.0x

Singapore Technologies Engineering Ltd 7919.30 SINGAPORE 8.222464 TICKER STE SP Industrials Aerospace & Defense Latest Min 12mth Forward PE 12.59 17.93x P/BV (Trailing) 5.47 3.01 Dividend Yield (Trailing) 2.38x 1.62 ROE (Trailing) 28.84 22.13

Max 26.48 9.56 8.25 36.31

Median 17.95 5.73 2.75 29.11

Average 18.02 5.71 3.62 28.98

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy

22

2 S.D. 12.60 3.38 -0.06 22.21

% to Min -30% -45% -32% -23%

Sep/14

Jan/14

May/13

Sep/12

Jan/12

May/11

Sep/10

Jan/10

May/09

Sep/08

Jan/08

May/07

Jan/06

Sep/06

May/05

Jan/04

Sep/04

Sep/02

2 S.D.+ 23.43 8.04 7.30 35.74

May/03

Jan/02

Sep/00

Summary

May/01

0.0x Jan/00

Sep/14

Jan/14

May/13

Sep/12

Jan/12

May/11

Jan/10

Sep/10

Sep/08

May/09

Jan/08

May/07

Jan/06

Sep/06

Sep/04

May/05

Jan/04

Sep/02

May/03

Jan/02

May/01

Sep/00

Jan/00

0.00

20-Feb-15 As Of: Local Price: 3.44 EPS: 0.19 % to Max % to Med % to Avg 48% 0% 0% 75% 5% 4% 247% 16% 52% 26% 1% 0%

Asia Pacific Equity Research 27 February 2015

Corrine Png (65) 6882-1514 [email protected]

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

 

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: ST Engineering.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: ST Engineering.



Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: ST Engineering.



Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: ST Engineering.



Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking ST Engineering.



Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from ST Engineering.



Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from ST Engineering. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-4770406 or e-mail [email protected]

ST Engineering (STEG.SI, STE SP) Price Chart OW S$4 6

OW S$4.2 N S$2.8

OW S$3.5 OW S$3.9

N S$3.05

OW S$3.7 OW OW S$4.6 S$4.8 N S$3 UW S$1.8 UW S$2.05 OW S$3.8

N S$4.05

N S$2.6 N S$2.8 N S$3.2 N S$3.4

OW S$4.5 OW S$4.3

4 Price(S$)

2

0 Oct 06

Apr 08

Oct 09

Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 14, 2007.

Oct 12

Apr 14

Date

Rating Share Price Price Target (S$) (S$)

14-Jan-07

OW

3.20

3.70

10-Aug-07 OW

3.72

4.60

29-Nov-07 OW

3.68

4.80

27-Feb-08 OW

3.60

4.20

12-Aug-08 N

2.80

3.00

19-Sep-08 N

2.55

2.80

11-Feb-09 UW

2.34

1.80

04-Aug-09 UW

2.63

2.05

27-Oct-09

OW

2.87

3.50

04-Dec-09 OW

3.16

4.00

18-Feb-10 OW

3.26

3.80

12-Apr-10

3.28

3.90

27-Sep-11 N

2.95

2.60

23-Feb-12 N

3.06

2.80

09-May-12 N

2.97

3.05

07-Nov-12 N

3.60

3.20

15-Feb-13 N

4.00

3.40

08-May-13 N

4.37

4.05

28-Feb-14 OW

3.82

4.50

07-Nov-14 OW

3.68

4.30

OW

23

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Png, Corrine: Air China - A (601111.SS), Air China - H (0753.HK), AirAsia BHD (AIRA.KL), Cathay Pacific (0293.HK), Cebu Air, Inc. (CEB.PS), China Airlines (2610.TW), China Cosco Holdings - A (601919.SS), China Cosco Holdings - H (1919.HK), China Eastern Airlines - A (600115.SS), China Eastern Airlines - H (0670.HK), China Shipping Container Lines - A (601866.SS), China Shipping Container Lines - H (2866.HK), China Southern Airlines - A (600029.SS), China Southern Airlines - H (1055.HK), EVA Airways (2618.TW), Evergreen Marine Corp Taiwan Ltd (2603.TW), Hanjin Shipping Co Ltd (117930.KS), Korean Air (003490.KS), Neptune Orient Lines (NOL) (NEPS.SI), Orient Overseas Int'l Ltd (0316.HK), Pacific Basin Shipping (2343.HK), Precious Shipping (PSL.BK), SIA Engineering Company (SIAE.SI), ST Engineering (STEG.SI), Singapore Airlines (SIAL.SI), Tigerair (TAHL.SI), U-Ming Marine Transport Corporation (2606.TW), Wan Hai Lines (2615.TW), Yang Ming Marine (2609.TW) J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2015 J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*

Overweight (buy) 45% 56% 45% 75%

Neutral (hold) 43% 49% 48% 67%

Underweight (sell) 12% 33% 7% 52%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected] Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries. All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

24

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. 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Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. Taiwan: This material is issued and distributed in Taiwan by J.P. Morgan Securities (Taiwan Limited). India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. 25

Corrine Png (65) 6882-1514 [email protected]

Asia Pacific Equity Research 27 February 2015

JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected] General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised November 29, 2014.

Copyright 2015 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

26

ST Engineering

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors .... 3. F e b. -1. 4. J u l-. 1. 4. D e c. -1. 4. 12M Fwd P/E. Mean. -2 S.D.. -1 S.D.. +1 S.D.. +2 S.D.. Mean: 19.1x. +1 SD: 22.0x. +2 SD: 25.0x. -1 SD: 16.1x. -2 SD: 13.1x. Current P/E: 20.00 .... managed services sales.

809KB Sizes 2 Downloads 211 Views

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