STEng – DBSV
Towards a strong 2H
• 2Q earnings rose 14% y-o-y in line, no change to our forecasts
• Aerospace division recovery on track, with higher growth expected in 2011
• Maintain BUY with S$3.55 TP; total return of 13% including dividends
Recovery in full swing. The Group reported an expectedly strong set of 2Q results with headline net profit of S$124m, up 14% y-o-y and 34% q-o-q. Revenue was up 8% y-o-y to S$1.5bn, on the back of the continuing recovery in Aerospace division as well as strong auto sales in Land Systems, which helped the division post record revenues in 2Q10 (+ 51% y-o-y). Bronco/ Warthog deliveries to the UK MOD will commence full steam in 2H10 and should be complete by 1H-FY11. Group PBT margin recovered from 8.6% in 1Q10 to 10.4% in 2Q10, driven by improving margins at Aerospace and Electronics divisions.
Aerospace will be the key driver. The aviation recovery will continue to drive Aerospace earnings, though the heavier checks will mostly lag the recovery and will likely kick in towards 2H11, according to management. In the meantime, the S$1bn Jet Airways order win has been followed by other long-term orders from Delta Airlines and Jetstar Group, which will keep the hangars busy. To position itself for the imminent upturn in MRO spending next year, STE has added one hangar in the US and the Xiamen engine facility will come on-stream by end-2010. A new MRO facility at Guangzhou is also expected to be ready by 2012-13.
Maintain BUY, potential yield of ~4.5%. The group ended the quarter with an orderbook of S$11.3bn and gross cash of S$1.7bn, and we remain confident of our FY10-11 forecasts. Our TP is unchanged at S$3.55. A weaker USD will be the key risk, going forward.