Move comes despite gross cash of S$1.4b in hand as at 1Q09. STE announced the issue of US$500m (S$725m) 10-year 4.80% bonds - part of the US$1.2b multicurrency medium term notes programme announced previously. The yield to maturity of 4.876% is about 150 bps above current 10-year US Govt bond yields and is about at par with STE＊s effective interest rate of 4.90% for FY08. This note issuance can largely be interpreted as a pre-emptive move by STE to diversify its funding sources since STE already had about S$472m in net cash and cash equivalents as at the end of 1Q09.

Strategic acquisitions likely to follow. The increase in interest costs will impact bottomline by about 2% in FY09 and 4% in FY10, in the absence of any income accretive acquisitions. However, that assumption may not hold. While we do not have clear visibility, we believe this move is geared towards enabling new M&A opportunities to propel growth in the near future. In the process, management has also locked in fixed interest rates instead of rolling over existing debt at potentially higher rates, going forward.

Re-rating to come on the back of renewed growth. While the stock is currently trading at 5.6% FY09 dividend yield, we expect that share price performance may be limited in the short term by concerns related to i) the usage of funds, and ii) dividend sustainability. But re-rating should be on the cards if management delivers on accretive acquisitions. With no significant acquisitions over the last 3 years, and with earnings starting to flatten out, STE needs to deliver on its growth trajectory before re-rating can occur. As such, we are neutral to slightly positive on the developments, pending further clarity. Maintain HOLD, TP S$2.50 (18x FY09 EPS).