FY08 results lacklustre: Net profit of S$474m (-5.9% YoY) was below consensus (S$496m) and above our forecast (S$462m). Operating income was down 7.5% YoY, as was the margin (9.5% vs 10.9% in FY07). Aerospace contributed less than 50% of profit for the first time since 2002 (post 9/11).
Net cash or net debt? The discussion on the company’s net cash/debt position hinges on the treatment of customer advances, which are sizeable. In a ‘growth organically only’ scenario, we believe that customer advances should be treated as part of the cash balance, placing the company in a net cash position (10% net cash/equity).
Assuming acquisitions, which we believe to be a strong likelihood over the next 12 months, we prefer to back out customer advances from the cash balance in analysing the balance sheet. In this scenario, the company enters a net gearing position (21%). We believe a reduction in the dividend payout is therefore highly likely in 2009.
In either scenario, it is worth noting that the company has been whittling down its cash balance to pay out 100% of earnings in dividends since 2002.
Guidance for lower earnings? Prima facie, the guidance for comparable earnings in 2009 is upbeat. However, we estimate this implies a 5.7% shrinkage in core earnings after backing out ~S$20m in benefits from the Budget announcements as a 5% strengthening in the US$/S$ rate. We also believe provisions will feature again in the FY09 results, given the challenging operating environment for airlines.
We have lowered FY09 and FY10 EPS forecasts by 9.6% and 10.7%, respectively.
12-month price target: S$2.60 based on a DCF methodology. Catalyst: Contract wins will be positive, offsetting negative newsflow on the airline industry.
We expect STE will outperform the index owing to its ‘safe haven’ status, due to its large exposure to defence sales. On an absolute basis, we expect the share price to track sideways for most of 2009, perhaps rallying late in the year. We maintain our Outperform rating.
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