ST Engineering Ltd - Margins recover in 2Q11 (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$3.05

Fair Value: S$3.58

Margins recover in 2Q11. ST Engineering's (STE) 2Q11 revenue fell 2.2% YoY and 5.3% QoQ to S$1484.3m, with lower revenues from the Electronics and Marine sectors partially offset by higher revenue in Aerospace sector. Despite the revenue decline, gross profit climbed 5.6% YoY and 10.9% QoQ to S$327.5m, which in turn improved its gross margin to 22.1% from 18.8% in 1Q11 (20.4% in 2Q10). Also aided by a 54.4% YoY jump (+81% QoQ) in share of associates profit, net profit grew 5.3% YoY and 17.5% QoQ to S$130.5m. For 1H11, revenue rose 6.0% to S$3051.5m, meeting 48.4% of our FY11 forecast, while net profit grew 11.5% to S$241.6m, meeting 47.0% of our full-year estimate. STE also declared an interim dividend of S$0.03/share (unchanged from last half year), payable on 2 Sep 2011.

Aerospace is star performer in 2Q11. For the quarter, Aerospace (+1.0% YoY, +12.0% QoQ) was the star performer, with revenue coming in at S$504m, although it did feel some impact from the weaker USD. Electronics (+1.0% YoY, -28% QoQ) was mixed with revenue of S$318m; the softer QoQ showing was due to lower value project milestone completions. Land system reported fairly softer revenue of S$350m (-14% YoY, -2% QoQ) due to lower scheduled project deliveries YoY. Marine sector posted a revenue of S$258m (+5.0% YoY, -5% QoQ), where it saw higher YoY Shiprepair revenue but weaker QoQ Shipbuilding revenue.

Expects higher 2H11 PBT. Going forward, management expects to achieve comparable revenue and higher PBT in 2H11 versus 1H11. As of end June, the group is sitting on an order of S$10.8b, with S$2.3b to be delivered in 2H11. For Aerospace, STE expects 2H11 revenue to be comparable, PBT to be higher. For electronics, 2H11 revenue is likely to be lower, while PBT comparable. For Land Systems, both revenue and PBT are expected to be higher. For Marine, it expects lower revenue but higher PBT. For FY11, management expects to achieve comparable revenue and higher PBT.

Maintain BUY with S$3.57 fair value. In line with the latest guidance, we see the need to pare our FY11 revenue estimate by 4.7% and earnings by 0.9% (we are also reducing our FY12 revenue forecast by 4.9% and earnings by 1.0%). However, as we are pushing out our valuations from 21x FY11F EPS to blended FY11/12F EPS, our fair value actually increases slightly from S$3.57 to S$3.58. Maintain BUY.