STEng – CIMB
• Below expectations. FY07 net profit of S$504m (+13% yoy) was 6% below our expectations but in line with consensus (S$511m). 4Q07 net profit of S$146m (+11% yoy) was 18% below our estimate but in line with consensus. The shortfall was due to lower-than-expected PBT from all divisions except Marine. 4Q07 sales improved 3% yoy to S$1.3bn.
• Aerospace and Electronics taking off slower than expected. Aerospace’s 4Q07 PBT dipped 5% yoy to S$87m, 30% below our expectations due to lower-thanexpected redeliveries of projects. We believe margin pressure could intensify as FY07 PBT margins were flat at 18%, below our expected 19.6%. Although 4Q07 Electronics PBT was up by 25% yoy to S$37.4m, the figure was 45% below our expectations due to weaker-than-expected earnings from iDirect from high development costs to upgrade products.
• Exceptional quarter for Marine but outlook is bleak. Marine’s 4Q07 PBT jumped 74% yoy to S$41m, thanks to higher ship repair jobs and investment income recognised. However, management is bearish over Marine’s FY08 revenue and PBT due to the completion of the Singapore frigate programme and execution of lower shipbuilding jobs by VT Halter Marine, US.
• Single-digit growth in FY08. Management indicated that FY08 growth could be a modest single digit on the back of the uncertain global economy and weakening US$. We are cutting our earnings estimates by 6-8% for FY08-09 to account for lower margin assumptions in Aerospace and slower earnings growth in Electronics and Land divisions.
• Maintain Neutral; target shaved from S$4.36 to S$4.01, still based on blended valuations, following our earnings downgrade. STE proposed a final dividend of 14.9 Scts, bringing FY07 dividend to 16.9 Scts for a yield of 4.6%. While we are comforted by its strong order book of S$9.49bn, we remain cautious, given the weakening US$ and softening US market which could hurt its US operations.