ST Engrg

ST Engrg delivered robust 2Q10 results with net earnings up 14% yoy & 34% qoq to $124m driven by double-digit qoq PBT growth across all the group’s divisions. Land system sales rose 54% qoq; 52% yoy to $407m, which incl Terrex, Warthog & specialized truck vehicle deliveries, accounted for the higher revenue. Aerospace revenue was up 13% qoq to $501m but was offset by 13% drop in Electronics sales to $314mn on lower value project milestones completion & lower Marine sales (-4% qoq).

1H10 net income grew 12% yoy to $217m or ~45% of FY10 consensus est. The order book stood at $11.3bn (1Q: $11.8bn) with $2.2bn expected to be recognised in 2H10.The pickup in both air and cargo traffic has yet to flow through to MRO demand as airlines continue to defer heavy maintenance to conserve cash. Mgmt expects a stronger uptake in 2011 given the 6-12 month lag effect in air traffic on MRO demand. With margins now rebounding back to 12.8% in 2Q10 from 9.6% in 1Q, the positive momentum is encouraging.

Healthy prospects in other divisions continue to progress with the steady delivery of the current order backlog. STE expects profits to rise in 2H10 for the aerospace and marine divisions, but sees lower profits for the land systems segment and little changed for the electronics division. Land systems PBT will be weaker due to less favourable product mix and higher R&D expense. The sector is scheduled to deliver the bulk of Warthog orders in 2H10 and the remaining units in early 2011. The successful rollout of this product puts it in good stead for future British Army defence procurement.

The stock currently trades at 21x FY10 P/E within its 12-24x historical range, backed by a divd yield of 4.4% and baseload of military and govt-related contracts. KE has a hold on the stock (TP: $3.15), Citigroup has a buy (TP: $3.80), DB has a buy (TP: $3.65).