ST Engineering’s 1Q09 results were slightly below expectations, with net profit at S$85.2m sliding 30% versus 1Q08 and down 17% sequentially. On a PBT basis, however, STE managed to grow by 25% sequentially, as 4Q included a tax write-back. However, with a second consecutive quarter of muted earnings, we believe that STE is feeling the effects of the current difficult business conditions, particularly in Aerospace.

Group turnover was flat at S$1.3bn, with a shortfall in Aerospace and Land Systems compensated by Marine and Electronics. Aerospace EBIT margins at 9% were lower versus 12% in FY08, due to an unfavourable sales mix. All divisions saw some level of margin pressure, except for Land Systems, whose margins improved from lower operating expenses.

Management has maintained its guidance for the full year, and expects FY09 to show comparable turnover and PBT to FY08. Despite the weak quarter, STE has characterised the performance as within their projections, and expects a stronger second half, based on its order flows. We expect this to come from higher deliveries for its Passenger to Freight conversion programme, as well as commencement of Bronco deliveries to the UK Ministry of Defence.

STE grew its orderbook to S$11.0bn from S$10.6bn at end-FY08. STE will deliver about S$2.9bn of this in the next 3 quarters. This puts it on track to deliver our full year turnover estimate of S$5.4bn. However, we are cutting our margin assumption further for conservatism, and to bring our estimates closer towards STE’s own guidance. As a result, we are cutting PBT by 5.7% to S$545.5m, and net profit by 9.3% to S$436.1m.

STE still expects to pay out 100% of earnings as dividends. With our cut in forecast, we reduce our FY09 projected dividends from 16.1 cts per share to 14.5 cts. Coupled with STE’s 17% price rise over the last 2 months, FY09 dividend yield is 5.5%. We are downgrading our recommendation to Hold, with limited upside to our target price of S$2.70.