Unexciting quarter

• Below expectations. 2Q09 net profit of S$109m (-9% yoy) was 10% below our expectation and 14% below consensus. The shortfall was mainly due to lower-thanexpected interest and investment income. 1H09 net profit of S$194m forms 43% of our FY09 forecast and 42% of consensus. STE announced an interim dividend of 3 Scts, the same as in 1H08.

• Aerospace rebounded from 1Q09 but margins remained weak. 2Q09 PBT of S$61m (-18% yoy) rebounded from S$40m in 1Q09, thanks to the lack of one-off financial costs on interest-rate swaps and better efficiency in PTF conversion programmes. 2Q09 PBT margins shrank 3% pts yoy to 12%, due to: 1) a weak US$; 2) lower investment income; and 3) an unfavourable sales mix with lower component sales. Management guides for a better 2H09 as the B757 PTF programme for FedEx is expected to turn profitable by end-2009 with another seven aircraft for delivery.

• Flat FY09; order book unexciting. Management expects higher PBT for Aerospace and Electronics in 2H09, offset by weaker Marine and a flat performance from Land Systems. Overall turnover and PBT for FY09 are expected to remain flat yoy. Order book slipped by 3% qoq to S$10.7bn in 2Q09. YTD announced contracts were lower at S$465m (S$680m in 1H08). Competition for contracts in the aviation industry remains stiff due to the economic downturn and aircraft capacity cuts. While we believe an improving macro environment could ease the pressure in the aviation sector, we believe it could take another 12 months before orders pick up.

• Lower net cash. Net cash dropped to S$198m in 2Q09 from S$482m in 1Q09. We believe the recent US$500m raised from a 10-year bond could be used to fund working capital needs and M&As. We see a re-rating of the stock only if earningsaccretive acquisitions are made. There have been no major M&As since the acquisition of BR Lee in the US in 2006.

• Maintain Underperform and target price of S$2.38, still based on blended valuations. As management has guided for a stronger 2H09, we have kept our earnings estimates intact. Valuation of 16x CY10 P/E looks rich against its generally flat outlook and uncertainties in the aviation industry.

Improved showing in 2Q09

• 2Q09 net profit of S$109m (down 9% y-o-y, up 28% q-o-q) in line with estimates
• 2H09 should be better, on the back of increasing contribution from B757 PTF redeliveries for Fedex
• Interim dividend of 3Scts declared, FY09 yield of 5.4% looks secure, barring significant M&A
• Maintain HOLD, TP revised up slightly to S$2.60

Sequential revenue growth across all segments. Topline grew 7% q-o-q and 8% y-o-y to S$1,409m – with the Electronics and Marine segments continuing to outperform. Group PBT, while weaker 8% y-o-y, was up 25% sequentially as well. Profitability wise, Aerospace was the star performer as margin recovered from 8.7% in 1Q09 to 12.2%in 2Q09. There could be further upside in 2H09, given that the PTF programme has turned around and will be increasingly accretive, with 7 more deliveries scheduled for the rest of the year. Land Systems PBT slipped 35% q-o-q, as weapons exports slowed.

Orderbook slips slightly to S$10.7b. YTD, STE has announced S$463m of new orders, compared to S$2.67bn new orders in FY08. While there is no near term pressure on revenues – as STE is poised to recognise about S$2.1bn of its existing orderbook in 2H09 – we believe long-term growth can be only be fuelled by M&A or investing in new capacity.

Defensive, at best. Despite a US$500m bond offering, concrete forward-looking steps are yet to be visualised. So, while earnings look secure – with management guiding for comparable revenue and PBT in FY09 vis-à-vis FY08, re-rating possibilities at 18x FY09 P/E are limited by concerns over growth. Maintain HOLD, in light of the 5.4% dividend yield – TP revised up to S$2.60 in line with
a slight revision in EPS numbers.

Improving sequentially

Improved quarter. Singapore Technologies Engineering’s (STE) 2Q09 topline grew to S$1.41b (+8% YoY, +7% QoQ) while PATMI was S$108.7m (-9% YoY, +28% QoQ). Sequentially, STE’s improved performance came from all its businesses except for Land Systems (lower forex gains, lower gross margin due to product mix). STE continues to iterate its guidance for a “comparable” turnover and PBT for this year. STE declared interim dividends of 3 S cents.

 Aero division to perform in 2H09. One MD-11 PTF and four B757 Passenger-to-Freighter (PTF) were converted this quarter giving a positive QoQ uptick in the Aero Division’s performance. Management indicated that the 757 PTF program will now be completely accretive (vs loss making learning phase in last few quarters) and will be delivering another seven conversions in 2H09. STE is confident that its geographical spread, diversified business segments and broad customer base will help sustain its topline. New programs that have been initiated a few years back (PTF and CFM engine) will be coming online to provide volume and a stable base load.

 Encouraging orderbook. STE maintained its orderbook at S$10.7b where it recognised about S$800m in its 2Q revenue while replenishing about S$500m of the orderbook through small contracts. S$2.06b will be delivered over the next two quarters. STE’s geographic and business diversification showed with contracts secured by all its divisions for work in various countries. China’s infrastructure spending will help to directly boost performance from its speciality vehicle business in the mainland.

 2H09 must perform. While making marginal upward progress, STE’s share price continues to trade in a tight range without large contract wins that typically served as share price catalysts. The first tranche of US$500m raised through its Medium Term Note program has not been slated for specific use despite market expectations of M&As. Should an acquisition occur, we feel it would not be significantly earnings accretive companies but smaller “bolt-on” companies to contribute technology platforms or distribution networks to the group. We are retaining our estimates and fair value of S$2.46 based on a blended 16x FY09/10F EPS. With limited share price upside along with a challenging 2H09 to navigate, we are maintaining our HOLD rating.

ST Engg Q2 profit drops 9.4% to $108.7m

It expects to achieve higher revenue and pre-tax profit in H2

SINGAPORE Technologies (ST) Engineering’s net profit for the second quarter fell 9.4 per cent to $108.7 million, from $119.9 million a year ago. This was despite an 8.3 per cent rise in turnover to $1.4 billion for the three months ended June 30.

The defence and aerospace group said that the year-on-year revenue rise was attributable to higher turnover from its electronics, marine and aerospace divisions, which offset the land systems sector’s lower turnover for the quarter.

But lower profit before tax from both its aerospace and land systems sectors offset growth in profits from the electronics and marine sectors.

The aerospace sector’s profit before tax fell 18 per cent to $60.9 million due to unfavourable sales mix and the US dollar exchange rate, while the land systems division’s profit fell a sharper 32 per cent to $17.2 million due to lower turnover, product mix and higher operating expenses.

Land systems’ revenue fell due to lower export deliveries of its munitions and weapons business, the group said.

The marine and electronics sectors saw pre-tax profit growth of 19 per cent to $24.3 million and 12 per cent to $32.9 million respectively.

During the second quarter, key order-book deliveries which contributed to higher revenue overall included more 757 passenger-to-freighter conversion redeliveries, milestone completions of communications and MRT projects, higher specialty vehicle sales, and favourable sales mix for shipbuilding.

ST Engineering’s order book stood at $10.74 billion as at June 30, of which $2.06 billion is expected to be delivered in the second half of this year.

Chief executive officer Tan Pheng Hock said at the group’s results briefing yesterday that ST Engineering ‘is not a seasonal stock’ and that as its revenue is order-book driven, comparisons with Q2 2008 may not reflect its performance.

When measured against Q1’s results, for instance, ST Engineering posted a 7 per cent increase in turnover and 28 per cent growth in net profit in the second quarter.

Comparing H1 2009 to H1 2008, the first half of this year registered 4.3 per cent revenue growth to $2.7 billion, while net profit fell 20 per cent to $193.9 million.

The group expects to achieve higher revenue and pre-tax profit in the second half of this year.

Mr Tan said: ‘Barring unforeseen circumstances, the group expects to achieve comparable turnover and profit before tax for FY 2009 over FY 2008.’

The group received $9.8 million from the government’s Jobs Credit Scheme in the second quarter.

ST Engineering had total borrowings of $897.5 million at the end of the quarter, compared with $881.4 million on Dec 31.

But the amount repayable within a year fell to $234 million, from $586.7 million three months before.

Its cash and cash equivalents at June 30 totalled $1.08 billion, $133 million higher than it had been at the end of Q2 last year.

The group’s total comprehensive income of $63.7 million attributable to shareholders was a 42.6 per cent drop from Q2 last year. But for the first half of this year, total comprehensive income rose 2.7 per cent to $190.8 million.

Earnings per share for the second quarter fell to 3.62 cents, from 4.01 cents in Q2 2008. Net asset value per share at the end of the second quarter was 46.7 cents, against 47 cents a year back.

ST Engineering’s board has approved an interim ordinary dividend of three cents a share, payable on Sept 10. The counter closed unchanged at $2.63 a share yesterday.

ST Engineering’s Q2 net profit down 9.4% to S$108.7m

ST Engineering has posted a 9.4 per cent drop in second quarter net earnings to S$108.7 million from a year ago on rising costs and operating expenses.

Revenue for the three months to June rose 8 per cent to S$1.4 billion. But this failed to offset the rise in costs and expenses during the quarter.

Compared to a year ago, cost of sales rose 11.4 per cent while operating expenses rose 8.2 per cent.

Nonetheless, the company maintained a strong order book of S$10.7 billion as of June. About S$2 billion of these orders are expected to be delivered in the second half of the year.

Barring unforeseen circumstances, ST Engineering expects to achieve higher turnover and profit before tax in the second half of the financial year, compared to the first half.