STEng – CS

2QFY08 missed; visibility remains poor

● ST Engineering reported 2Q results on Tuesday evening. The results were weaker than the company’s guidance as well as our expectations which are below consensus estimates.

● Due to lower contributions from Aerospace, overall 2Q operating profit rose only 2% to S$149 mn. The weakness at Aerospace is attributed to a weaker US$, higher prototyping costs and higher depreciation on the back of increased capital expenditure.

● 1H08 turnover and net profit represents 47% and 45%, respectively, of our full year previous projection. Consequently, we have cut our FY08 net earnings forecast by 7% and expect more substantial cuts in consensus numbers. We have also cut our DCF-based target price by 7% to S$3.22 (from S$3.47).

● YTD, the stock has already fallen 25% and underperformed the market by 7%. Also, the dividend yield of 6% should provide some downside support. However, trading at 17x FY08E and 15x FY09E P/E, the stock is still not cheap – especially given the company’s growth profile. We are maintaining a NEUTRAL rating.

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