STEng – DBSV
Stays on course to good finish
• 3Q net profit of S$130m (+8% y-o-y) in line; Group on track to meet our FY10 estimates
• Aerospace division contract win momentum remains steady, faster growth expected in FY11
• Revise TP to S$3.85 as we roll over valuations to FY11; maintain BUY for 15% return potential
On track to 6% EPS growth in FY10. 3Q10 net profit of S$130.2m (+8% y-o-y, +5% q-o-q), met 51% of our 2H-FY10 net profit estimate. Revenue came in at S$1.49b, up 10% y-o-y largely owing to higher deliveries of Terrex and Warthog armoured vehicles to the Singapore and UK armed forces, respectively. Despite the unfavourable product mix in Land Systems segment, Group PBT margin in 3Q improved to 10.7% from 10.4% in 2Q, as a result of higher margins in Aerospace and Marine divisions, partly driven by lower staff costs.
Aerospace should fire in FY11. Recovery in the airframe and engine MRO sector has been slow, as evidenced by the lack of sequential growth in Aerospace revenues, but we remain optimistic of a faster pace of growth in FY11. PTF conversions continue to provide stable base loads to STE’s hangars and chances are high that the eventual conversion pipeline for Fedex could be higher than 87 planes in the original contract. MRO order win momentum continues to be healthy as the Group has won S$370m worth of heavy maintenance contracts in 3Q10, in addition to an S$85m component and engine support contract with T’Way Air.
Maintain BUY, potential yield of ~4%. The group ended the quarter with an orderbook of S$10.8b (excluding about S$400m procurement contract) and we remain confident of our FY10-11 forecasts. Our TP is revised up to S$3.85 as we roll over valuations to FY11. A weaker USD can be a slight dampener, going forward.