- BUY, SGD4.80 TP, 21% upside with c.4% yield. In its 1Q22 update, ST Engineering reported in-line revenue of SGD2bn, with all segments booking YoY growth. It still reported strong order wins, with SGD2.4bn in new contracts during the quarter – which took total orders to an all-time high of SGD21.3bn. STE announced a quarterly DPS of 4 SG cents. We remain upbeat on it delivering defensive growth, aided by a gradual revival in the aerospace business. Key catalysts: Sustained strong contract wins, the commercial aerospace business recovery, and higher margins.
- All segments reported revenue growth. In 1Q22, its Commercial Aerospace (CA) revenue rose to SGD674m (+22% YoY, at 26% of our 2022 estimate), while Urban Solutions & Satcom (USS) revenue increased by 12% YoY to SGD297m (23% of our 2022 estimate), and Defence & Public Security (D&PS) revenue rose to SGD1,062m (+9% YoY, at 25% of our 2022 estimate).
- CA outlook continues to improve. Its airframe maintenance, repair and overhaul (MRO) business has seen an almost full recovery (80% capacity utilisation in 3Q21), while the engines and component MRO is operating at 80% capacity (70% in 3Q21). Demand for passenger-to-freighter (P2F) services remains strong – with A330P2F conversion slots booked until 2026 and A320/A321P2F conversion slots booked until 2025. Increasing the scale of operations should boost its P2F profitability, as STE will double its P2F aircraft induction this year. Nacelle production is expected to ramp up for the rest of 2022.
- Strong order win momentum. STE reported SGD2.4bn worth of order wins in 1Q22 (+54% YoY, -25% QoQ). This comprised of SGD0.9bn from CA, SGD200m from USS and SGD1.3bn from the D&PS business (Figure 1). The CA business continued to see strong order wins with A330P2F orders by DHL and CDB Aviation. The consolidation of TransCore from 17 Mar contributed SGD1.6bn of orders into STE’s orderbook, which has now reached a record high of SGD21.3bn (Figure 2), implying >two years of revenue visibility. STE expects SGD5.8bn of the orderbook to be realised as revenue in the last nine months of 2022 (94% of our revenue estimate).
- Working to keep costs in check. STE issued USD1bn bonds (USD700m due in 2027, USD300m due in 2032) and has managed to lower its weighted average cost of borrowing undertaken to acquire TransCore to 1.8% pa (Figure 3) – thanks to the favourable settlement of Treasure Locks gains of USD91m, which will be amortised over the period of the bonds. STE remains confident of covering up the SGD200m gap from the government support shortfall through higher revenue, cost savings and productivity improvements Our SGD4.80 TP includes an 8% ESG premium over the fair value of SGD4.45.
Source: RHB Research - 17 May 2022
