• Keep BUY with SGD4.60 TP, 22% upside and c.4% yield. We see ST Engineering’s (STE) recent share price correction as a buying opportunity. The price correction was caused by a lower than expected 1H22 earnings and concerns around its growing debt levels in a rising interest rate environment. We see no changes in STE’s growth outlook and maintain that it should deliver defensive growth beyond 2022, aided by a revival in global aviation traffic, gains from growing demand for smart-city solutions, and rising global defence spending. We expect its DPS of 16 cents to remain steady and forecast 8% core profit CAGR in 2021-2024F.

• Share price weakness offers an opportunity to accumulate the stock. STE’s share price has corrected by 6.9% since the announcement of its 1H22 results on 12 Aug 2022. The stock has also underperformed the STI Index by 5.4% during the same period. We had noted in our post results research report that its 1H22 core net profit of SGD226m had accounted only for 37% of our previous 2022F estimates. This had led to us lowering 2022F core net profit by 9% and 2023F-2024F profit by 1% and 2%. 2023F consensus earnings was downgraded 2%. Despite the downgrades, both the Street and us remain positive about STE delivering strong earnings growth beyond 2022F and a steady DPS of 16 cents, implying an yield of over 4%. Based on our estimates, STE is now trading at 18.2x 2023F EPS, which is below the six-year average P/E of 19.8x.

• Continues to win new orders. STE announced a SGD1.4bn contract win to provide turnkey rail services including rail electronics solutions as well as above-ground train depot design, construction and equipment fit out for the new Kaohsiung MRT Yellow Line. STE will be responsible for overall project management and serve as the systems integration lead. It will also provide the communications system, automatic fare collection system, platform screen doors, traction electrification system, depot design and construction, and depot maintenance equipment for the Yellow Line. The contracted scope is expected to start by late 2022 over a period of 10 years. This is a strong order win under its Urban Solutions & Satellite Communications (USS) business, which has been reporting an average quarterly order win of SGD340m since 1Q21.

• Strong quarterly order wins and record orderbook. STE announced SGD3.1bn worth of new contracts in 2Q22 (+69% YoY, +28% QoQ). Strong order wins were reported by its Defence & Public Security and Commercial Aerospace businesses. STE reported its highest order backlog of SGD22.2bn, which implies a book-to-bill ratio of 2.7 years – SGD4.6bn of this order book is expected to be delivered in 2H22, representing 100% of our 2H22 revenue estimates.

Source: RHB Research - 2 Sep 2022