STEng – CIMB
Lacklustre; more weakness ahead
• Largely in line, lifted by tax write-back. 3Q08 net profit of S$129m (+3% yoy) was largely in line with our estimate and consensus. Results were lifted by a S$17m tax write-back of deferred tax asset adjustments during the quarter. Without the tax reversal, net profit would have been S$111m, only 22% of our full-year forecast mainly due to Aerospace weakness. 9M08 net profit of S$371m (+4% yoy) represents 72% of our FY08 forecast.
• PBT dragged down by weaker Aerospace. 3Q08 PBT of S$144m (-6% yoy) was mainly affected by lower contributions from Aerospace. The weakness in Aerospace was due to: 1) a depreciating US$; 2) learning-curve costs for PTF conversions of B757-300 and B767-300; and 3) higher depreciation from increased capex. Aerospace PBT margins dropped to 15% (3Q07: 19%) as a result.
• Profit guidance lowered; more bankruptcy filings by customers. Management now flags a weaker PBT and marginally weaker PATMI for FY08 (previous quarter’s guidance was for a comparable FY08). Separately, STE announced that its customers, Sterling Airlines and Essential Aircraft Maintenance Services, had filed for bankruptcy. STE estimates the earnings impact from these customers at S$10m.
• Earnings estimates cut by 4-16% for FY08-10. Reflecting the disappointing 3Q08 results and weaker guidance, we have cut our FY08 earnings by 4% as we lower our margin expectations for the Aerospace division. We also cut our FY10-11 earnings by 16%, with slower growth assumed for all divisions.
• Balance sheet healthy but weak near-term growth prospects. Fundamentally, STE remains in excellent health with net cash of about S$600m. Order book is S$9.5bn (up from S$9.3bn in 2Q08). However, trading at 15x CY09 P/E given its muted earnings growth and uncertainties from the global economy, the stock is not cheap.
• Downgrade to Underperform from Outperform; target price reduced to S$2.61 from S$3.39, taking into account our earnings downgrade and rolling forward our target to CY10 in our blended valuation. A share price re-rating is likely only in 2H09, probably triggered by an improved Aerospace performance.