• Keep BUY and SGD5 TP, 10% upside and 3.5% yield. ST Engineering delivered a strong set of 1H24 results, aided by growth across all business segments. We expect Commercial Aeropsace (CA) to maintain its operating momentum while Defence & Public Security (DPS) continues delivering on its orderbook. We also see tailwinds from a potential recovery in Urban Solution & Satcom (USS) and likely lower interest rates in 2025, which ought to continue supporting mid-teen earnings CAGRs during 2023-2026. We expect STE’s net debt position to improve while dividends remain steady.

• Outlook remains strong. We leave our estimates unchanged and maintain that the continuing demand for aviation MRO work, higher aircraft engine nacelle deliveries, and improving margins for its passenger-to-freighter (PTF) conversions will drive the CA business higher in 2H24. We maintain the right- sizing and cost optimisation exercises for the USS segment undertaken in 2023 should boost EBIT in the coming years. We expect growth in the DPS segment to sustain, as the group continues to deliver the orderbook.

• Record high orderbook and potential for lower interest costs. STE won new contracts worth SGD3.1bn in 2Q24 (-35% YoY, unchanged QoQ). It reported a record order backlog of SGD27.9bn, implying a book-to-bill ratio of 2.8 years. SGD4.9bn of the orders will be delivered in 2H24, at c.90% of our 2H24 revenue estimate. STE estimates its 2024 weighted average borrowing costs at 3.7% (our estimate: 3.5%), assuming no US Federal Reserve rate cuts in 2024. Amidst our expectations of two rate cuts in 2H24, and additional rate cuts in 2025, we see a possibility of lower interest costs in 2025 (not in our estimates yet). This is because 39% of STE’s debt remains exposed to a floating interest rate.

• Strong 1H24 results. All three business segments reported YoY growth in revenue and improvements in EBIT. Revenue and EBIT for the USS division came in below our estimates, while the DPS unit’s EBIT significantly exceeded our expectations. We note that this deviation could be due to project delivery timing. We maintain the view that the USS wing should see sustained improvements in operations during 2H24, as STE remains focused on improving processes and optimising costs for this business. The group is only involved in the operations & maintenance of the New York congestion pricing project. It is not impacted by the pause in the project, as it is not responsible for revenue collection.

• As expected, an interim dividend was declared. STE declared an interim dividend of 4 SG cents. 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 SGD4.81.

Source: RHB Research - 20 Aug 2024