STEng – CIMB
Mid-term earnings visibility impaired
• Below expectations. 1Q08 net profit (+13% yoy) came in 13% below our estimate and 11% below consensus, forming 22% of our FY08 forecast. The gap could be explained by a depreciating US$ and slower-than-expected growth at Electronics. Stripping out forex, pretax profits would have been S$5.5m higher.
• Aerospace hurt the most by weakening US$. The bulk of Aerospace’s revenue is denominated in the US$. Although utilisation at its US operations remained high and not much pricing pressure was felt, the depreciating US$ was a drag on revenue translation. In 1Q07, the average translation rate was S$1.57/US$; this became S$1.42/US$ in 1Q08. Margins dipped to 18% from 20% mainly on lower sales and higher expenses incurred for the Singapore Airshow and the development of new prototype products. We believe 2Q08 will be stronger with more project redeliveries, especially the Fedex 757 PTF and 767BCF for ANA.
• Electronics affected by iDirect and lack of associated income. The weaker performance at iDirect was due to a delay in product launches to 2H08. The disposal of ECS in 4Q07 also reduced associated contributions. Management has guided for a flat 1H08. On the back of this, we are lowering our FY08 turnover forecast by 5% and projecting slower growth for FY09-10.
• Land Systems surprised positively, led by defence contracts. Earnings came in above our expectations due to higher margins achieved for military contracts and stronger weapons and munitions sales, though these were partially offset by lower earnings from its special vehicles division in the US.
• Order book remained strong at S$9.2bn, with about S$4.2bn for recognition in FY08, representing 73% of our forecast. The order-book balance is net of a S$1bn contract loss from SkyBus as the latter filed for bankruptcy recently. Order-win momentum in 1Q08 was still strong with new contracts of about S$1bn.
• Maintain Neutral; target price reduced to S$3.70 from S$4.01. Earnings estimates cut by 1-3% for FY08-10, to reflect slower growth at Electronics. Our target is still based on blended valuations but we discount our P/E by 20% to 16x from 20x and reduced the LTG in DCF to 1% from 2% on the back uncertainty. Given STE’s sensitivity to US$ weakness and a sluggish US economy, its mid-term earnings visibility has been affected. However, dividend yield is attractive at 6%.