Sticking to its guidance. STE continues to iterate its guidance for a "comparable" PBT for this year while turnover has been downgraded from "higher" to "comparable". For 1Q09, "nil" deliveries of the very mature and profitable MD-11 Passenger-to-Freighter (PTF) conversion created the gap between our forecasts and actual earnings. While Aerospace has contributed to significant drag in the previous quarters, the 757 PTF conversions are expected to be accretive in FY09F after its loss-making year in FY08. This should kick in during 2H09. We have adjusted our estimates to factor in a weaker 1H09 and are giving STE a chance to perform for its 2H09.
Still vague with order book. With the exception of Land division, management maintained its enigmatic view of the division that has driven the order book to its record highs. The remainder of the 48% of our topline can be fulfilled from recurrent businesses that are not reflected in the order book.
Defensive but not growth. STE's share price initially saw its share price trade in a tight range (S$2.00-S$2.50) without large contract wins or accretive acquisitions that typically served as share price catalysts. While its S$1.38b of cash equivalents puts STE in good stead to make acquisitions, we doubt that significant ones that will give major earnings accretion to the group will occur this year. We have rolled our valuation forward to a blended 16x FY09/10F PER (prev. 15x FY09F PER) and our fair value is bumped up to S$2.46 (prev. S$2.31). However, the recent 30% surge with the market rally since our upgrade on the 13 Feb seems to have factored in a growth story vs. our estimates which show a decline for FY09F. In view of the limited upside, we are downgrading our rating to a HOLD. Sustained improvements in margins and accretive contract wins will incentivise us to re-peg our valuation.
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