Downgrade to HOLD.  With the 3% YoY decline in net income for FY13 will 9MFY13, our expectations for an 8% earnings growth for likely be missed. While we remain positive on STE's long term prospects, we view this poor set of results negative and expect weakness in stock sentiments near term. Furthermore, our expectations of a potential major contract win for the US Coast Guard could be delayed and taking reference from FY12 PATMI of SGD576m, the PER of 22.6x appear fair and. We will review our model assumptions and expect to lower our estimates for the next two years. Downgrade to HOLD and await better entry point.

Poor showing this quarter. STE reported lower net income of SGD131.4m (-10% YOY, -11% QoQ) with key disappointments from 1) poor contributions from Land Systems, 2) impairment charge for the marine segment and 3) lower contributions from ST Synthesis and Miltope. While order book remains strong, it trended marginally lower to SGD12.5b (1Q13: SGD13.0b, 2Q13: SGD12.7b).

Surprise impairment charge for ROPAX contract. STE recorded an impairment charge of SGD23.7m in the quarter due to "prolonged softness" in the European shipping market. While the impairment charge was partially offset by write-back on warranty provisions of SGD14.4m, this took us by surprise as we had expected all provisions associated with the ROPAX contract to have been fully provided for Consequently, while the Marine division recorded very strong shipbuilding sales of SGD207m (+40% YoY) in the quarter, PBT declined by 2.4% YoY to only SGD13m. Hence, our expectation a bumper year for its marine business, from major project deliveries, looks set to be missed.

Guidance revised down. Management cited weak business sentiment due to macro uncertainty from 1) speculation over QE tapering in the US, 2) challenging European environment and 3) softening of the China economy. Consequently, management lowered their full-year guidance of "Higher Revenue and PBT" in the previous quarter, down to "Comparable Revenue and PBT" when comparing FY13 to FY12.

Source: Maybank Kim Eng Research - 8 Nov 2013