STEng – DBS

Improved showing in 2Q09

• 2Q09 net profit of S$109m (down 9% y-o-y, up 28% q-o-q) in line with estimates
• 2H09 should be better, on the back of increasing contribution from B757 PTF redeliveries for Fedex
• Interim dividend of 3Scts declared, FY09 yield of 5.4% looks secure, barring significant M&A
• Maintain HOLD, TP revised up slightly to S$2.60

Sequential revenue growth across all segments. Topline grew 7% q-o-q and 8% y-o-y to S$1,409m – with the Electronics and Marine segments continuing to outperform. Group PBT, while weaker 8% y-o-y, was up 25% sequentially as well. Profitability wise, Aerospace was the star performer as margin recovered from 8.7% in 1Q09 to 12.2%in 2Q09. There could be further upside in 2H09, given that the PTF programme has turned around and will be increasingly accretive, with 7 more deliveries scheduled for the rest of the year. Land Systems PBT slipped 35% q-o-q, as weapons exports slowed.

Orderbook slips slightly to S$10.7b. YTD, STE has announced S$463m of new orders, compared to S$2.67bn new orders in FY08. While there is no near term pressure on revenues – as STE is poised to recognise about S$2.1bn of its existing orderbook in 2H09 – we believe long-term growth can be only be fuelled by M&A or investing in new capacity.

Defensive, at best. Despite a US$500m bond offering, concrete forward-looking steps are yet to be visualised. So, while earnings look secure – with management guiding for comparable revenue and PBT in FY09 vis-à-vis FY08, re-rating possibilities at 18x FY09 P/E are limited by concerns over growth. Maintain HOLD, in light of the 5.4% dividend yield – TP revised up to S$2.60 in line with
a slight revision in EPS numbers.

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