STEng – CIMB
• Net earnings below expectations but operationally in line. 3Q07 net earnings of S$125m (+9% yoy) were 17% below our expectation and 11% below consensus due to lower investment gains and interest income. 9M07 earnings account for 67% of our full-year estimate. Operating profits, however, were exactly within expectations. EBITDA and EBIT grew 13% yoy to S$180m and S$144m respectively. Sales rose 7% to S$1.2bn, led by a stronger Marine division.
• Aerospace margins shaped up; expect stronger 4Q07. 3Q07 pretax margin rose to 19% from 17% in 3Q06 thanks to a better product mix including redeliveries of two PTF aircraft to Boeing and UPS. The margin improvement was also helped by a turnaround at SAS Components. 3Q07 revenue was flat at S$443m due to the timing of deliveries but 4Q07 could be boosted by more deliveries.
• No growth for first the time in Land Systems. 3Q07 PBT of S$14.5m (down 20% yoy) was a contrast to the strong growth achieved in the previous three quarters. The weaker performance was due to higher R&D spending, lower sales and the product mix. Softness in the US housing market also affected the specialty vehicle business. Management believes the slowdown in the US could continue in 4Q07.
• Outlook remains positive, dividend yield sustained. Management has guided for higher PBT for Aerospace, Electronics and Land Systems in FY07 while Marine earnings are expected to be comparable to FY06. We believe the record-high order book of S$9.91bn and consistent earnings growth (3-year CAGR of 14%) will sustain its dividend yield of 5%.
• Maintain Outperform, target price raised from S$S4.10 to S$4.36, still based on blended valuations. Our earnings estimates remain intact on expectations of a stronger 4Q07. We have rolled forward our P/E valuation to CY09, which raises our target price to S$4.36. The stock’s defensive qualities stand out in the current market with a prospective dividend yield of 5% and ROE of 33% vs. peers’ (SCI and Keppel) averages of 3% yield and 23% ROE. Key risks include a weakening US$ and a slowdown in the US which could hurt its US operations.