STE has fared well thus far. We believe ST Engineering (STE) will report a marginal decline in earnings in 2008 on the back of lower investment income. However core operations remain resilient and earlier concerns of a slowdown in the aerospace sector impacting STE have not fully materialised. Meanwhile, the company is now in a stronger position than before, given its record orderbook. This will have a positive bearing in 2009 and 2010 as revenue from these contracts is recognised progressively.

We are excited about GE Aviation's 20-year engine maintenance programme with STE as well as the latest Budget 2009 initiatives. The market has not appreciated the significance of this agreement, which essentially provides STE with long-term earnings continuity for engine maintenance and cements its relationship with the largest commercial aircraft engine manufacturer. Likewise, Budget 2009 has specific measures aimed at reducing the cost of aircraft maintenance, which should again result in a re-rating of the stock.

Three more reasons why STE is a BUY. The key reasons for our positive view of STE are as follows: a) its orderbook remains at record levels and includes a notable £150m contract from the UK Defence Ministry, b) STE has proven that its earnings are resilient in the face of a global slowdown, and c) signs of improved load factors in the US have reduced the risk of airlines grounding more aircraft and lowered the risk of airline bankruptcies. We believe the market will eventually accord STE a higher PE rating for its earnings resilience. We peg the stock at 16.5x 2009 earnings and derive a target price of S$2.82. Meanwhile this Aaarated firm offers a dividend yield of 7.4%.