• Reiterate BUY, new SGD4.50 TP from SGD4.45, 15% upside, c.4% yield. ST Engineering outperformed the STI this year, and remains a Singapore defensive earnings growth pick. We expect 19% YoY PATMI improvement in 2H23, aided by Commercial Aerospace (CA) EBIT growth and Urban Solutions & Satcom (USS) returning to positive EBIT. In the medium term, CA and USS should continue to drive growth. We estimate 18%, 63%, and 8% EBIT CAGR from the CA, USS, and Defence & Public Security (DPS) segments in 2022–2025F.

• The investment thesis has not altered. We still believe that, with a solid SGD27.5bn outstanding orderbook – which should give nearly three years of revenue visibility – STE should see defensive earnings growth. In the medium term, CA should benefit from higher MRO earnings as aviation traffic, particularly in Asia, sees gradual improvement. CA should also see better profits as the passenger-to-freighter (PTF) conversion business continues to grow, offering economies of scale and improvements in the learning curve. The USS unit's earnings should improve as a result of the right-sizing exercise and earnings contribution from its TransCore acquisition. The DPS business’ profitability should be supported by the gradual delivery of the orderbook. We maintain our 19% profit CAGR estimate for the 2022-2025F period.

• 2H23F earnings preview. STE will report its 2H23 and FY23 results on 29 Feb, before the financial market opens. We expect 2H23F PATMI of SGD303m (+19% YoY, +8% HoH), driven by CA reporting higher YoY operating profit. We estimate CA’s operating margin will improve to 8.8% in 2H23F from 6.0% in 2H22 and 8.2% in 1H23. We expect USS to see a return to operating profit after an operating loss of SGD31m in 1H23, which includes SGD24m in SatixFy divestment losses and SGD2m in Satcom severance expenses. Amid expectation of a moderation in operating profit margin, we believe DPS’ 2H23F operating profit will moderate HoH.

• No change to estimates, but we roll forward our valuation basis to 2024. We continue to derive our TP using an average of P/E, P/BV, EV/EBITDA, and DCF. However, we now roll forward our valuation basis from blended forward estimates to 2024 estimates. We also remain confident of STE paying 4 cents of dividends each quarter, implying a defensive yield.

• ESG. Our TP now includes a 4% ESG premium (from 6% previously) over the fair value of SGD4.35 (previously SGD4.20), based STE’s 3.3 ESG score, which is above the 3.1 country median (previously 3.0).

Source: RHB Research - 21 Feb 2024