STEng – CIMB
• In line; maintain Outperform. 2Q10 net profit of S$124m (+14% yoy) met our expectations and consensus, with 1H10 accounting for 45% of our FY10 forecast. Qoq profits improved in all businesses with Aerospace being the clear leader. Our earnings estimates and target price of S$3.62 are unchanged, still based on blended valuations. We continue to like STE for its: 1) defensive revenue; 2) sustainable high ROEs (30%); and 3) decent dividend yields of about 5%. We see catalysts from more sizeable order wins, M&As and a stronger pick-up in Aerospace.
• Aerospace: more upside in 2011 from MRO pick-up. Aerospace’s 2Q10 PBT of S$64m (+5% yoy, +50% qoq) met our expectations. PBT margins expanded 320bp qoq to 12.8% from stronger work volume. Management attributed this to PTF deliveries and maintenance contracts. There had been no strong pick-up in MRO jobs yet in 1H10 despite the recovery in the global aviation industry as heavy maintenance spending usually lags by 6-12 months, depending on airlines. Therefore, we are likely to see positive spillover in 2H11, providing earnings upside to the division. Aerospace recently secured a heavy maintenance and C-checks contract from Delta Airlines for 75 units of its 757 aircraft. No amount was disclosed but we estimate the contract value at more than US$100m.
• Steady growth in Electronics. PBT of S$35m (+5% yoy, +23% qoq) was spurred by a good sales mix and stronger contributions from iDirect. PBT margins improved 380bp yoy and qoq to 11% from the sale of better-margin products. We expect steady growth from Electronics on the back of the execution of train and transportrelated contracts secured in 1H10.
• Balance sheet remained strong. The group had a net cash position of S$334m. Given its robust balance sheet, we believe it is still on the lookout for acquisitions to power its longer-term growth. Although order book shrank slightly to S$11.3bn in 2Q10 from S$11.8bn in 1Q10, this is still considered high against its historical order books.