Highlights

Simons Trading Research

Author: simonsg   |   Latest post: Wed, 21 Sep 2022, 11:12 AM

 

ST Engineering - Still Optimistic on the Outlook; BUY

Author:   |    Publish date:


  • ST Engineering (SGX:S63) should deliver defensive growth, aided by a revival in global aviation traffic, gains from growing demand for smart-city solutions, and rising global defence spending. While 1H22 core earnings were below expectations, its strong order wins and record-high orderbook should keep investors interested.
  • While recent M&A increased ST Engineering's operating costs and debt burden, we believe the acquired businesses will support medium-term profit growth. We expect 8% core profit CAGR in 2021-2024F.

ST Engineering's 1H22 Core Profit Was Below Expectations

  • While profit of S$280m accounted for 46% of our estimates, it included a pre-tax one-off pension restructuring gain of S$72m. Core net profit of S$226m (-18% h-o-h, - 24% y-o-y) accounted for 37% of our estimates.
  • Commercial Aerospace (CA) continued to register revenue growth (+24% y-o-y) in 1H22, aided by increased MRO services and nacelle deliveries. ST Engineering shared that while airframe MRO hangars are full, engine and component MRO business should continue to recover in 2H22.
  • The key margin disappointment came from the Urban Solutions & Satcom (USS) segment, which reported EBIT loss amidst transaction and integration costs for TransCore and impact from chip shortages.
  • ST Engineering announced an interim dividend of 4 cents.

Strong Order Wins and Record Orderbook

  • ST Engineering won new contracts of S$3.1bn in 2Q22 (+69% y-o-y, +28% q-o-q). Strong order wins were reported by its Defence & Public Security (DPS) and CA businesses.
  • ST Engineering reported its highest order backlog of S$22.2bn, which implies a book-to-bill ratio of 2.7 years – S$4.6bn of this order book is expected to be delivered in 2H22, representing 100% of our 2H22 revenue estimates.

Higher Near-term Costs From TransCore Acquisition

  • Urban Solutions & Satcom (USS) segment revenue increased S$757m (+14% h-o-h, +43% y-o-y) aided by contribution from the TransCore acquisition and higher smart city deliveries. However, the business registered an EBIT loss amidst:
    • TransCore transaction and integration expenses of S$21m,
    • lower government support of S$3m and
    • weaker performance of Satcom, caused by semiconductor chip shortages.
  • TransCore is expected to keep operating costs elevated (annual integration costs of S$10m) as well as the debt burden (additional S$700m of borrowings). We believe TransCore will also support ST Engineering’s medium-term profit growth in the USS business.

Adjusting Earnings Forecast for ST Engineering

  • We lower 2022F core net profit forecast for ST Engineering by 9% to account for the one-off gain and 2023F-2024F profit by 1% and 2%.
  • Our target price for ST Engineering is derived by using an average of P/E, P/BV, EV/EBITDA and DCF of FCF. Our target price includes an ESG premium of 8% over the fair value of S$4.26.
  • Maintain BUY recommendation on ST Engineering with new S$4.60 target price from S$4.80, 13% upside, 4% yield.

Source: RHB Invest Research - 15 Aug 2022

Share this

Related Stocks

Chart Stock Name Last Change Volume 
ST Engineering 3.60 -0.02 (0.55%) 6,364,200 

  Be the first to like this.
 


APPS
I3 Messenger
Individual or Group chat with anyone on I3investor
 
 

186  214  222  592 

ActiveGainersLosers
Top 10 Active Counters
 NameLastChange 
 HSI 17600MBeP.. 0.137+0.003 
 Sembcorp Marine 0.106-0.001 
 YZJ Fin Hldg 0.385-0.005 
 YZJ Shipbldg SGD 1.08-0.03 
 Frasers L&C Tr 1.25-0.03 
 Nippecraft 0.095+0.009 
 Genting Sing 0.79+0.01 
 Mapletree Log Tr 1.59-0.01 
 CapLand IntCom T 1.96-0.03 
 HPH Trust USD 0.193-0.006 
PARTNERS & BROKERS