ST Engineering: Losing steam

Core numbers weaker sequentially as well. While revenue of S$1.3b was within expectations and flat y-o-y, PBT was down 29% y-o-y to S$111.3m. While it looks better than 4Q08 PBT of S$88.9m at first glance, it should be noted that the 4Q08 number includes S$54m of charges related to impairment and allowances.

Strong showing by Electronics and Marine but... Aerospace PBT was down 52% y-o-y to S$40m, as the B757 PTF conversions continue to be loss making. In contrast, the MD-11 conversion program was already profitable and accretive in 1Q08. The Land Systems arm saw revenues dip 32% in 1Q09 as auto sales in US declined sharply. We expect both these sectors to be weak in FY09 – the Bronco deliveries to UK have already been pushed to 2010 and aircraft maintenance/ conversion schedules may be susceptible to deferments.

Time to look beyond defensive. Management expects to achieve results in FY09 comparable to FY08. Orderbook did indeed climb to a record S$11b and balance sheet looks stronger with higher net cash of S$480m. However, given the weakness in Q1, unfavourable timing of programs in Aerospace and lower margin projects across segments, we lower our FY09 and FY10 EPS estimates by 6-8%. Downgrade to HOLD, in the absence of any near-term catalysts – the stock is ex-dividend now – and we believe high beta stocks are more likely to perform in a recovery scenario than defensive stocks. Our TP is maintained at S$2.50 –pegged at 17.5x FY09F. At current price, the stock is trading close to its normalized PE of 18x to 21x.

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