ST Engineering announced its 1Q FY09 results on 5 May. Net profit fell by 28.7% YoY (down 14.6% QoQ) on a 0.2% YoY rise in revenue (down 2.1 QoQ).

The company’s management revised down its FY09 revenue guidance to ‘comparable’ to the FY08 level from ‘higher’ than, but maintained the FY09 pre-tax profit guidance at ‘comparable’. In absolute terms, the 1Q FY09 net profit was lower than we expected. However, the guidance and the management’s comments reaffirmed that a higher-margin orderbook should be delivered in 2H09.

The results were below our expectations due primarily to slightly weaker-than-expected revenue for the Aerospace and Land Systems operations, and thinner-than-expected margins for the Electronics Systems division. However, there was a small positive surprise in the Land Systems division. In our view, the variances with our estimates were not major.

We maintain our earnings forecast, our six-month target price and our 3 (Hold) rating.

Our six-month target price of S$2.50 is based on a 6.4% target yield on our FY09 EPS forecast and a 100% target dividend-payout ratio.Catalysts and action

In our opinion, ST Engineering is a classic ‘defensive stock’ (eg, its share price falls less in down markets). We see the stock as a major source of positive (or negative) portfolio alpha depending on the direction of the market from here. Our 3 rating reflects our forecast that the FSSTI should be close to where it is today in six months’ time (target: 1,950).