• Keep BUY, with new SGD5.00 TP from SGD4.50, 12% upside and c.4% yield. We roll forward our valuation to a blended FY24F-25F. In June, ST Engineering announced the development of a highly secure and AI-ready data centre in Singapore by 2026 costing SGD120m. It recently entered into a two-year agreement (with an extension option) to provide module repair offload support for CFM LEAP-1A and LEAP-1B engines, thereby further strengthening its commercial aerospace (CA) capabilities. We maintain STE remains on track to deliver a c.15% profit CAGR during 2023-2026.

• Adding capabilities to CA. STE’s CA business has entered into a two-year agreement (with an extension option) to provide module repair offload support for CFM LEAP-1A and LEAP-1B engines for Safran Aircraft Engines (Safran). STE is also expanding its LEAP engine capabilities, including the addition of LEAP-1A engine testing services expected by 3Q24. It will also support Safran with LEAP-1B engine maintenance offload services, in addition to existing support for CFM56-5B, CFM56-7B, and LEAP-1A engines. There is a growing demand for MRO services as the number of LEAP engines – which power the Airbus A320neo and Boeing B737 MAX family of aircraft – in operation grows rapidly. The LEAP engine has a substantial backlog of over 10,600 engines indicating continued growth in the industry.

• Investing in new AI-ready data centre in Singapore. STE has commenced construction on its fourth data centre in Singapore, scheduled for completion in 2026. This seven-storey facility, which is designed to meet international cybersecurity standards and standards for responsible AI development, aims to attract customers prioritising security and sustainability. The data centre will achieve a high Power Usage Effectiveness (PUE) of 1.25, exceeding the BCA-IMDA Green Mark Platinum standard of 1.3, with sustainability features like solar panels covering 2,400sqm. With an estimated cost of SGD120m over the next three years, the data centre will expand STE’s total IT capacity to over 30MW across four Singapore locations.

• 1H24 results on 14 Aug 2024. We remain upbeat on STE for its defensive dividends (4 SG cents per quarter) and strong profit growth, aided by continued growth and margin improvement in CA and a strong recovery in the urban solutions & satcom (USS) segment. We look forward to further updates about the outlook from management on 14 Aug (1H24 results announcement). Our TP includes a 4% ESG premium.

Source: RHB Research - 22 Jul 2024