STEng – DBS

Promising set of results

• Net profit of S$120m(+11% qoq) is in line with expectations
• Strong rebound in aerospace margins q-o-q, as PTF conversions become profitable
• We expect MRO market recovery in FY10
• Maintain BUY; revised TP of S$3.30, attractive dividend yield of 4.8%.

Group PBT up 7% q-o-q. 3Q09 revenue of S$1.35b (down 2% y-o-y, 4% q-o-q) and net profit of S$120m (down 7% yo-y, up 11% q-o-q) were in line, and 9M09 net profit of S$314m equates to 74% of our full year projections. 3Q09 PBT of S$149m, though, was higher, driven by strong performances in the Aerospace and Land Systems segments.

Margin recovery in Aerospace to 3Q08 levels. Aerospace PBT climbed 15% q-o-q, as margins improved further to 15% vs.12% in 2Q09 – on the back of profitable PTF conversions. Land Systems PBT jumped 62% q-o-q on the back of a better product mix.

Order backlog still looking good. Orderbook at the end of 3Q09 stood at S$10.3b, down slightly from the end-2Q number of S$10.7b. About S$0.9b of this will be delivered in 4Q09. However, going by the S$865m of order wins already announced in Oct’09, the orderbook should be more than replenished at the end of 4Q09.

Maintain BUY. Our earnings estimates for FY09 remain unchanged, since 4Q09 may be impacted by a weaker USD. However, given our view that the MRO players could lead the recovery in the air travel industry, and given the better visibility of the profitability of the PTF conversions, we re-look our assumptions for the Aerospace segment and revise up our FY10 and FY11 EPS estimates by 6% and 3%, respectively. Our target price is correspondingly revised to S$3.30, still pegged to 20x FY10 earnings. While STE has outperformed the STI index since our recent upgrade, we believe it still has some way to run, given that it is still trading at valuation premiums much lower than the historical average of 40%.

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