• Maintain BUY and SGD4.15 TP, 19% upside, with c.4% FY23F yield. ST Engineering’s 9M22 revenue of SGD6.5bn was in line, accounting for 74% of our 2022 estimate. It reported strong order wins in 3Q22, with an outstanding order book (excluding the US marine business) of SGD23.1bn at an all-time high. TransCore’s latest contract delivery is expected to start in 2024. Despite some concerns about higher interest costs, we continue to like STE for its strong revenue visibility and a defensive dividend outlook. We expect it to deliver a 8% profit CAGR in 2022–2024F.

• All businesses reported YoY growth. STE reported 3Q22 revenue of SGD2.2bn (+22% YoY, unchanged QoQ). On a YoY basis, all businesses reported revenue growth: Commercial aerospace (CA) (+28% YoY), urban solutions & satcomm (USS) (+74% YoY), and defence & public security (DPS) (+5% YoY). However, on a QoQ basis, growth in CA revenue (+6% QoQ) was offset by lower USS (-2% QoQ) and DPS (-3% QoQ) revenue. CA revenue growth was driven by higher demand for nacelle deliveries, MRO services, and passenger-to-freighter (PTF) conversions. STE’s P2F conversion slots are booked until 2025-2026 but the rate of growth is expected to slow down in the near term.

• Strong order wins. STE reported SGD4.8bn (+163% YoY, +56% QoQ) of order wins in 3Q22. Excluding SGD1.9bn in orders related to STE's US marine business, which it intends to divest, the company's outstanding order book stood at an all-time high of SGD23.1bn, providing over two years of revenue visibility. USS reported SGD2.0bn (+424% YoY, +388% QoQ) of order wins, followed by SGD1.8bn (+336% YoY, +25% QoQ) by DPS and SGD1.0bn (-3% YoY, -18% QoQ) by CA.

• Capital optimisation plans. STE reported a gross debt of SGD6.8bn as at end-3Q22, of which 46% (SGD3.1bn) was based on floating rates. The QoQ increase in debt was attributed to an increase in the aviation asset business and the USD's appreciation vs SGD. STE intends to term out USD500m-700m of its floating rate debt via longer-term fixed coupon bonds or loans. STE shared that it would look at securitising several hundred million (c.SGD500m) worth of aviation assets in the next few months to pare down its debt. It will also continue to optimise its net working capital and divest non-core businesses.

• Steady dividend outlook. STE declared a quarterly dividend per share of 4 cents. A full year dividend per share of 16 cents implies a yield of c.4%. We continue to derive our TP using an average of P/E, P/BV, EV/EBITDA, and DCF. The TP of SGD4.15 includes an 8% ESG premium over the fair value of SGD3.85.

Source: RHB Research - 30 Nov 2022