STEng – DBS

Margins weakened at Aerospace

Story: 2Q08 net earnings of S$119.9m was disappointing, coming in 2% below 2Q07 numbers due to lower-thanexpected earnings growth in the Aerospace and Land Systems segments. The weaker US$ shaved S$12m from group PBT in 1H08.

Point: The 18% y-o-y dip in Aerospace earnings came on the back of flat revenues as PBT margin slid more than 3 ppts to 15% (historical low) on account of i) the depreciating US dollar, ii) slower than expected ramp up in new facilities (Panama) and iii) higher prototyping costs as the Group worked on conversions of three types of passenger aircraft to freighters. Land Systems profits fell 9% y-o-y as a result of lower margins in the automotive segment and higher losses from associate CityCab. Electronics segment profit was up 13% y-o-y on the back of higher contribution from iDirect, which launched its new products. Marine segment was the
surprise package with earnings growth of 21% despite lower sales, as higher proportion of high-margin ship-repair works led to a 2.5 ppt margin expansion. With recent contracts wins (to build a Diving Support Vessel) and renewals (component supply to Polish Airlines) in place, orderbook stands at S$9.3b, of which about S$2.1m should be recognised in 2H08.

Relevance: We have revised our FY08 and FY09 earnings forecasts downwards by about 6% and 5% respectively. Management guided for flat FY08 earnings vs modest growth previously. We reiterate our concern about the Group’s exposure to the US airline industry – which is in the midst of paring capacity – and to the weak US economy (via Marine and iDirect in addition) to the extent of 28% of Group sales (down from 34% in 1H07). The recent strengthening of the US$, however should provide some respite to earnings, if sustained. As such, we keep our Target Price unchanged at S$2.80, and continue to maintain HOLD on the stock given attractive dividend yield in excess of 6%.

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