STEng – CIMB
Aerospace slack taken up by others
• Maintain Underperform; results within expectations. 4Q09 net profit of S$129.7m (+52% yoy) was within our expectations (S$132.3m) and consensus (S$124.4m). The star segments were Land Systems and Marine, offsetting Aerospace weakness. Although a better 2H09 kept full-year PATMI on a fairly even keel (-6% yoy), the recovery outlook is not certain. Management guides for comparable PBT for 2010. We cut our FY10-11 EPS by 5% on lower Aerospace assumptions and introduce FY12 earnings. As a result, our blended target price dips from S$3.09 to S$2.98. Another negative was the reduced dividend payout of 90%, from 100%. Full-year DPS of 13.3cts was below our expectation of 15cts and consensus (14.5cts).
• Poor Aerospace performance, but positive guidance. 4Q09 Aerospace PBT (S$57.4m) floundered after a promising 3Q (S$70.2m). Management cited fewer passenger-to-freight (PTF) jobs in 2009, sporadic work cancellations and a lack of replacement MRO jobs in 4Q. Indicative MRO demand in early 2010 was positive, though, and ongoing PTF contracts are expected to sustain profitability.
• Earnings growth for other divisions. Land Systems and Marine performed above our expectations in 4Q. Both, as well as Electronics, should book higher profitability in FY10. Land Systems should be supported by the delivery of large-sized contracts to Terrex and Warthog; both started in 2009. Marine should benefit from an Egyptian Navy contract realised in 2010, plus a variety of vessels due for delivery in the US. Higher-margin contracts (LTA Circle Line, military communication systems) should also contribute to Electronics.
• Lower payout and above-mean valuations do not make us excited about the stock. Order book was flat at S$10.3bn. 2009 PBT (S$547m) was propped up by the Jobs Credit Scheme (S$39m), partially erased by higher stock obsolescence (-S$26m). 2010 earnings have to make do without such assistance and would have to depend on: 1) a sustainable Aerospace recovery; 2) major overseas contract wins for Land Systems; and/or 3) M&A growth. STE is trading at 20.1x CY10 P/E, above its 5-year average of 18x. We find it difficult to turn positive at this point.