• Reiterate BUY with SGD4.50 TP, 13% upside, c.4% yield. We reiterate our positive outlook on ST Engineering, which still has defensive dividends at SGD0.04 per quarter, and strong earnings growth as all business segments witness robust growth. The Commercial Aerospace (CA) segment should see continued growth and margin improvement, while Urban Solutions and Satcom (USS) should see a strong recovery. We estimate a 15% profit CAGR for 2023–2026.

• Unchanged positive investment thesis. STE’s earnings outlook remains defensive. Its order backlog of SGD27.4bn implies a book-to-bill ratio of 2.7 years. STE expects SGD7.9bn of the orderbook to be delivered in 2024, accounting for 73% of our 2024F revenue estimate. We expect STE to continue paying SGD0.04 per quarter in dividends. We also expect near-term earnings growth to remain strong as its CA business benefits from higher MRO earnings on the back of better aviation traffic, higher nacelle sales, and improved profits for its passenger-to-freighter (PTF) conversion business amidst 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 Defence & Public Security (DPS) business’ profitability should be supported by the gradual delivery of its orderbook. A potential decline in interest rates would be positive, as 38% of STE’s debt is still exposed to a floating interest rate.

• 2023 sustainability report. STE achieved a 36% reduction in Scope 1 and 2 greenhouse gas (GHG) emissions over the 2010 base year (2022: 37% reduction, 2030 target: 50% reduction). Total emissions rose 4.9% YoY on the back of higher economic output. However, GHG intensity as a measure of revenue (for its Singapore operations) has been on a consistent decline since 2020. Direct energy consumption saw a 15% YoY decline, while total waste generated fell 22% YoY. However, waste recycling fell to 67% from 75% in 2022. On the social front, most metrics were unchanged, except for the increase in the average number of training hours per employee, which rose 33%. However, the amount contributed to the community declined in absolute terms and also as a percentage of revenue. We also noted a YoY percentage reduction in the number of independent directors on the board. However, the percentage of female directors is on the rise and stands at 23%.

• No change to estimates; ESG impact on our valuation. In our ESG analysis, we reduced the score for board independence by one point. However, our overall ESG score remains at 3.3. Our TP includes a 4% ESG premium over the fair value of SGD4.32 as STE’s ESG score is two points above the 3.1 country median.

Source: RHB Research - 8 Apr 2024