Singapore Technologies Eng Ltd - Good performance slightly marred by weak US$ (CIMB)

OUTPERFORM Maintained

S$3.05 Target: S$3.88

Mkt.Cap: S$9,316m/US$7,753m

• Broadly in line; maintain Outperform. 2Q11 net profit of S$130.5m (+5% yoy) meets our expectation and consensus, with 1H11 net profit of S$241.6m (+11% yoy) forming 45% of our FY11 forecast. Qoq profits improved for all segments, with Aerospace leading the growth. An interim DPS of 3.0cts has been declared, representing a 70% payout (1H10: 73%). Our earnings estimates and target price of S$3.88 are unchanged (blended DCF, P/E, and dividend-yield valuations). Amid challenging macro conditions, management is optimistic that 2H11 would be stronger. STE is trading at 15x CY12 P/E, a 16% discount to its 5-year historical average despite a steady 3-year earnings CAGR of 7% and strong ROEs of above 30%. We see catalysts from a stronger MRO pick-up for Aerospace.

• Strong Aerospace performance. Powered by Components & Engine Repair (CERO) and Engineering & Materials (EMS), Aerospace turnover climbed 12% qoq to S$503m while PBT improved 20% qoq to S$68m. Yoy, turnover was flat but PBT rose 17%. With airlines rolling out previously-delayed maintenance schedules, management anticipates CERO to be the biggest beneficiary in the short term.

• Electronics boosted by satellite sales. Though revenue dropped 11% qoq to S$318m (weaker large-scale ground communications sales), PBT rose 11% qoq to S$36m on higher-margin satellite sales.

• Land Systems and Marine benefited from better sales mixes which resulted in strong qoq growth. PBT margins for Land were stable qoq at 9% while Marine’s margins grew 60bp qoq to 11% largely from an improvement in shipbuilding margins of 7% (1Q11: 3%).

• Slightly marred by weak US$. If not for a declining US$, management said 1H11 net profit would have grown 16% yoy vs. the reported 11%. For every 1% weakness in US$, STE’s PBT could be affected by S$3m. On the other hand, US$ weakness helps US aerospace operations to be more cost-competitive, especially in tendering for jobs in Europe.

• Management is upbeat on 2H11, powered by stronger Aerospace, Land Systems and Marine. Order book dipped to S$10.8bn (from S$11.3bn in 1Q11), of which S$2.3bn is expected to be delivered in 2H11.