Operating margins at the aerospace division improved from 8.9% in 1Q09 to 11.6% to 2Q09. This came on the back of profits from passenger to freighter (PTF) conversion work and the absence of interest rate swap expenses. One of the primary concerns was a slowdown at the aerospace segment and continued losses on FedEx's B757 PTF conversion work. With the improvement in PTF conversion work, we expect margins to improve slightly at the division, but this would be contingent on a stable US dollar.
Maintenance, repair and overhaul (MRO) rates are in US dollar. STE expects a better 2H09 and has guided higher pre-tax contributions from the aerospace and electronics segments; and flat contributions from the land systems and marine segments. The electronics division is expected to recognise contributions from the LTA Circle Line and Taiwan MRT projects, as well as the integrated resort project.
We have raised our net profit forecast slightly by 1.0% for 2009 and lowered net profit for 2010 by 0.5% after factoring in higher turnover, slightly better aeropace margins and higher interest expenses from a recent US$500m notes issue. At the current price of S$2.63, the stock is trading at 18.1x 2009 and 2010 average earnings and close to mid-cycle valuations. A stronger topline growth and improvement in the PTF conversion work warrant an upgrade. We now peg the stock at a slightly higher PE band multiple of 16.5x on twoyear forward earnings. We upgrade our recommendation from SELL to HOLD. Our new fair price is revised to S$2.40.
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