• Reiterate BUY with SGD4.50 TP, 13% upside, c.4% yield. ST Engineering's 2023 performance was in line. Post results briefing, we still believe that the business outlook for all segments remains robust. The ongoing recovery of Commercial Aerospace (CA) and strong improvements in Urban Solutions and Satcom (USS) should drive medium-term earnings growth. Defence and Public Security (DPS) revenue should continue to improve on orderbook delivery. We expect a 15% profit CAGR in 2023–2026. STE should continue paying 16 cents of dividends each year while lowering its debt levels.

• Strong 2023 results. 2023 revenue came in at SGD10.1bn (+12 YoY), with the CA and USS segments reporting strong growth. The reported PATMI of SGD587m (+10% YoY) was in line with our estimates. Excluding one-offs, recurring PATMI was SGD612m (+27% YoY). CA and DPS segments reported EBIT growth. On a recurring basis, USS EBIT was down YoY after accounting for the one-offs from the SatixFy divestment losses and severance expenses related to right-sizing the business. As expected, the 2023 dividend came in at 16 cents.

• Outlook remains strong. The recovery of the CA segment will continue to be aided by the ongoing gradual pick-up in global air travel. We get a sense from management that the passenger-to-freighter (PTF) conversion and nacelle businesses are going strong. 2023 CA EBIT margin came in a tad below our estimate. However, we expect this to improve as PTF margins strengthen on the back of higher deliveries. The TransCore business has now become net earnings accretive. The right-sizing exercise for the USS segment should boost its EBIT in the coming years. We expect growth in the DPS segment to sustain as STE continues to deliver the orderbook.

• Strong order wins and the potential for lower interest costs next year. STE won new contracts worth SGD3.1bn in 4Q23 (+12% YoY, +43% QoQ). It reported an order backlog of SGD27.4bn, implying a book-to-bill ratio of 2.7 years. SGD7.9bn of the orderbook will be delivered in 2024, at 73% of our full-year revenue estimate. STE’s weighted average borrowing cost for 2023 was 3.3%. We expect this to increase marginally to 3.5% in 2024. With expectation of a rate cut in 2H24 and 38% of STE’s debt still exposed to a floating interest rate, we see a possibility of lower interest costs in 2025.

• Small estimate changes. We raise the 2025 profit by 4%. We continue to derive our TP using an average of P/E, P/BV, EV/EBITDA, and DCF. The TP includes a 4% ESG premium over the fair value of SGD4.33.

Source: RHB Research - 4 Mar 2024