Valuations still above previous crisis

• Below expectations. 1Q09 profit of S$85.2m (-30% yoy) forms 19% of our FY09 estimate and 18% of consensus. The shortfall was mainly due to weaker-thanexpected performances from Aerospace and Electronics. Poor results provide further justification for our negative view.

• Aerospace dragged down by poor sales mix and one-off financial costs. Aerospace PBT of S$39.8m (-52% yoy) was 30% below our expectation mainly due to: 1) no MD11 freighter conversion redeliveries in 1Q09 which fetch better margins, 2) one-off financial costs of S$6.5m to unwind an interest-rate swap in the CERO business; and 3) no investment income from the EMS business. PBT margins shrank yoy and qoq to 8.7%. Management guided for comparable turnover but lower PBT for 1H09 vs. 1H08. We believe margins for Aerospace could remain weak due to a challenging aviation outlook and losses from PTF conversion projects in 1H09.

• Electronics: weaker-than-expected margins. While Electronics turnover of S$338m was above our expected S$293m, PBT was S$21.7m was below our expected S$26m due to higher operating expenses. PBT margin dropped from 8.2% in 1Q08 to 6.4% in 1Q09. However, we believe the division will catch up from 2Q09, with the help of stronger project milestone recognition for the LTA’s Circle Line, Taiwan MRT projects, communication products as well as software systems. This is in line with management’s earlier guidance of better PBT for FY09.

• Outlook for FY09. Management expects overall FY09 turnover and PBT to be comparable to FY08. Order book grew 4% qoq to S$11bn. Our earnings estimates are intact as we expect a pick-up in 2H09.

• Maintain Underperform and target price of S$2.38, still based on blended valuations. Current valuation of 16x CY10 P/E is still above previous crisis valuations of 13-14x. Widely perceived as a defensive stock, the stock has started to lag recently when the market surged. We believe that the poor results adds a new catalyst for further underperformance, especially since this is one of the most widely owned stock in institutional investor’s Singapore portfolio. We continue to see limited catalysts in the near term.

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