ST Engineering: Performing within expectations

Higher top and bottomline. 3Q08 revenue rose 11.8% to S$1,382.4m as STE recorded higher
turnover from all sectors except its Marine division while net profit inched up 2.7% to S$128.9m
due to lower taxes. The decrease in profit before tax (PBT) was mainly due to the weakening
US$ which continued to take its toll on the company and higher Passenger-to-Freighter (PTF)
prototyping costs, although higher depreciation expenses within the Aerospace business was
also a factor.
The Aerospace segment continued to be the mainstay of STE as it contributed 36.3% and 47.8%
to top and bottomline respectively for 3Q08.
Margins hit across the board. PBT margin in 3Q08 was lower at 10.4% as STE was dragged
down by its Aerospace and Electronics sectors which had recorded lower margins. While the
Land Systems division continued to depict a 5% PBT margin, a better showing from the Marine
segment that was attributed to a favourable sales mix had failed to improve the overall picture.
Remains in net cash position. STE’s cash balance decreased from S$1.2b to S$935.8m in
3Q08 YoY mainly due to higher capex and the payment of dividends. STE’s current cash hoard
is still higher than its total borrowings of S$886m.
Outlook has not turned bearish. Notwithstanding the currently weak global economic
environment, STE’s order book increased from S$9.29b in 2Q08 to S$9.54b in 3Q08, where
S$1.25b is expected to be delivered in 4Q08. Management also stressed that despite several
airliners presently operating under bearish conditions and a potential further weakening of the
US$, it remains confident of riding through this rough patch given its capabilities.

Aerospace. This segment should continue to determine the overall profitability of STE.
Management highlighted that despite its drop in operating profit for 9M08, it remains one of the
most profitable entities among the various aviation MRO companies. Of note, although STE’s
capex for its PTF prototyping capabilities had dragged down the company’s performance in
3Q08, this sub-segment is expected to provide a lift to its overall business in the near future.
According to aviation consulting firm TeamSAI, the global MRO market is expected to reach
US$45.1b in 2008 and is forecasted to hit US$56b by 2013 while projected to grow at a 4%
CAGR from 2008 – 2018. Given that revenue from STE’s MRO business has only been
US$904m for the year so far, we believe that there are further opportunities that the company
can tap into.
Electronics. With earnings coming in almost flat during 3Q08 although revenue had increased
26%, management is expecting a comparable PBT for the current year. However, it is
noteworthy that profitability in FY07 had included some divestment gains – stripping that off, the 5 November 2008
company believes that PBT would actually be higher for FY08. Turnover recognition from several
of the ongoing projects are to be expected going forward.
Land Systems. Due to the higher taxes paid, net profitability for this division saw the biggest
decline percentage-wise as it fell 19.8% to S$13m in 3Q08. As the company continues with its
pursuit of defence programmes and the contractual deliveries of its munitions & weapon
products and specialty vehicles, FY08 PBT is forecasted to be higher.
Marine. Net earnings for this sector rose 6.6% to S$16.5m in 3Q08. According to management,
the higher profitability in its Shipbuilding sub-division was largely offset by the lower earnings in
the Shiprepair and Engineering sub-segments. Going forward, due to the one-off S$10m gain
seen in 4Q07, management is guiding for a lower PBT in 2008.


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