Lowering 2009 net profit by 9.6%. The International Air Transport Association's (IATA) latest assessment of US$9b losses for global airlines has negative implications for ST Engineering’s (STE) aerospace unit ST Aerospace (ST Aero), which derives 80% of its revenue from Asia and North America. Consequently, we do not expect margins to improve in 2H09. We have cut our 2009 and 2010 earnings estimates for STE by 9.7% and 8.0% respectively. We are also mindful that any further weakness in the US dollar will have a negative impact on ST Aero in 2H09, given that maintenance, repair and overhaul (MRO) billings are in US dollars.

Market has not factored in impact of lower IATA guidance on MROs. Contrary to positive expectations in the marketplace, neither ST Aero nor SIA Engineering has reported an improvement in maintenance operations. The market is simply projecting a recovery in airlines and extrapolating that to MROs. A recovery will only take place if traffic picks up and if airlines utilise grounded aircraft. That has yet to materialise for Asian or US carriers. IATA’s dire expectations for the airline industry do not bolster confidence.

Electronics segment and possibly military sales to buffer impact of smaller aerospace contributions. The electronics segment is expected to mark milestone contributions from Land Transport Authority’s (LTA) Circle Line and Taiwan's Mass Rapid Transit (MRT) projects in 2009. Contributions from this division and regular defence-related work are expected to partially offset the decline in the aerospace division.

Lower target price to S$2.04 and maintain SELL. Our forecast is the second lowest among consensus forecasts after the downward adjustment. We lower our fair price to S$2.04 from S$2.14. Our fair price is derived from the lower end of STE’s historical PE band and approximates the sum-of-the-parts valuation of S$2.09.