STEng – DBSV

Currency issues derail earnings slightly

At a Glance

• Net profit of S$93m (including forex losses) was slightly below our estimates as Aerospace earnings disappointed

• Earnings should, however, gather momentum in 2H10 as new projects in Aerospace, Land Systems contribute

• Management more upbeat on prospects for rest of year, expects FY10 Group PBT to be “higher” than FY09

• Maintain BUY with reduced TP of S$3.55 as we trim our FY10 EPS estimates by 3.6% on account of weaker US$

Comment on Results

Weak margins and forex losses. Owing to a slowdown in the components business, Aerospace division margins weakened to 9.6% in 1Q10 vs. 12.9% in 4Q09 and PBT declined 26% q-o-q. As a result, the Group’s reported net profit of S$92.8m (up 9% y-o-y, down 28% q-o-q), on the back of S$1.36bn in revenues, came in slightly below our estimates, even after adjusting for a forex loss of S$8.3m. Being more heavily exposed to the heavy maintenance business, the ongoing recovery in air travel has had a more lagged effect on STE’s MRO business than earlier anticipated. Land Systems PBT was also down 13% y-o-y, partly due to a weak Euro.

Recommendation

Management seemed more upbeat about the Group’s prospects for the rest of the year, as they now expect FY10 PBT to be “higher” than FY09 PBT, rather than “comparable” as guided at end-FY09. This comes on the back of a robust orderbook of S$11.8bn, up significantly from the S$10.3bn as of end-FY09. The new contract from Jet Airways (India) should commence in 2Q10, and a majority of the Warthog deliveries to the UK MOD are also scheduled for 2H10. On the PTF conversion front, 3 aircraft were redelivered in 1Q10 and another 14 aircraft are scheduled for redelivery in FY10, thus adding to Aerospace division profitability. Key risk is currency. Every 1 % change in USD/SGD rate affects topline by S$13m and bottomline by about S$1.3m. Thus, given the prospects of a weaker US$ –our economist recently revised his end-FY10 USD/SGD target to 1.34 from 1.38 – we trim our FY10-11 EPS estimates by 3-4% and adjust our TP to S$3.55. Maintain BUY; given the largely stable earnings base and decent dividend yield of 4.5%.

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