STEng – CIMB

Turnaround year

Maintain Outperform, results in line. 1Q09 net profit of S$92.8m (+9% yoy) was below our initial expectation of S$112m and consensus (S$121m), forming 19% of our FY10 forecast. The star segments were Marine and Electronics, offsetting Aerospace weakness. However, we expect stronger subsequent quarters to make up for the shortfall as management guides for better turnover and PBT in FY10 vs. FY09. Our earnings estimates are unchanged with our target price still at S$3.62, based on blended valuations. We see catalysts from more sizeable order wins and a stronger pick-up in all divisions.

Aerospace seasonally weak; aviation industry bottomed out. 1Q10 Aerospace PBT of S$42.7m (+7% yoy) was below our expectation mainly due to a slower-than expected pick-up in the components division and fewer milestone completions. Sales in the US remained strong on the back of long-term contracts with airlines. Aerospace delivered three PTF projects in 1Q10. We believe there is room for improvement in its PTF margins as another 12 deliveries are expected in subsequent quarters. We expect 2Q10 earnings to be stronger (above S$58m) as management guides for a better 1H10 vs. 1H09 (S$101m). Management also sees the aviation industry bottoming out and expects MRO spending to resume in 6-9 months’ time.

Stronger outlook for Marine and Electronics. Marine’s order book has been ‘healthy’ with brisk shipbuilding at VT Halter Marine US and Singapore yards. Management also sees more enquiries on specialised vessels in Singapore which could offset weaker rates in ship repair. Electronics is expected to be positive from more milestone completions for LTA’s Circle Line, the Taiwanese MRT, satellite communications and software system projects.

Land Systems hit by forex loss. 1Q10 PBT of S$22.8m (-14% yoy) was affected by lower sales in the Munitions & Weapons division. The group also booked a S$6m forex translation loss as a result of euro weakness.

Record-high order book. Group order book reached S$11.8bn with YTD announced wins of about S$1.9bn mainly from Aerospace. About S$3.2bn will be recognised in the coming quarters. Operational cash flows improved 18% yoy to S$457m in 1Q10.

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