STEng – CIMB

Earnings recovery priced in

• Results in line, maintain Underperform. 3Q09 net profit of S$120m (+8% yoy) was in line with our expectation and consensus. 9M09 net profit of S$314m (-15% yoy) forms 70% of our FY09 forecast. We raise our target price from S$2.78 to S$3.09, still based on blended valuations as a result of our earnings upgrade and lower WACC assumption. However, we maintain Underperform as we see limited catalysts to justify premium valuations (18x CY10 P/E) against a modest 3-year earnings CAGR of 4%.

• 3Q09 revenue dipped 2.2% yoy to S$1.3bn with weaker-than-expected revenue from Land Systems because of lower-than-expected project milestone completion, offset by stronger shipbuilding recognition for Marine. Qoq, revenue was down 4% from weaker sales in Electronics, offset by a surge in Marine.

• Aerospace margins improved but still far from historical levels. 3Q09 PBT margins for Aerospace improved 2.7% pts qoq to 14.9% but fell short of our expected 16%. 9M09 PBT margins of 12% were still much lower than their historical average of 20% due to a steep learning curve for the PTF conversion programme. While management sees a potential pick up in the aviation sector from 2010 as airlines resurrect their mothballed aircrafts, we see limited upside for FY10 Aerospace earnings as we have already assumed 20% growth in PBT from a stronger MRO baseload and higher margins.

• Marine stronger than expected. 3Q09 PBT of S$25m (+18% yoy) was above our expectations from a favourable sales mix due to higher shipbuilding at VT Halter Marine US. Shipbuilding margins also improved to 6% (from 3% in 3Q08).

• Earnings estimates raised by 2% for FY10-11 but lowered by 0.3% for FY09, to incorporate: 1) stronger revenue but lower margins for Aerospace; 2) higher margins for Land Systems and Marine; and 3) stronger revenue for Electronics.

• Strong order book. Order book was S$10.3bn, of which S$970m is expected to be recognised in 4Q09. Order-win momentum has accelerated with S$858m new orders secured in Oct 09.

• Earnings recovery priced in. STE is trading at 18x CY10 P/E, slightly above its 5-year average of 17x. We believe current valuations have priced in modest earnings growth (8-12%) expected for FY10 and FY11.

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