• Keep BUY and SGD5.20 TP, 10% upside and 3% yield. ST Engineering announced a new shipbuilding contract win for the design and construction of a Walk-to-Work (W2W) vessel. Although the value of the contract was not disclosed, this marks STE's expansion into the market for specialised vessels supporting offshore operations. We remain positive on its outlook and expect an earnings CAGR of 15% for 2023-2026F, supported by the commercial aerospace (CA) and urban solutions & satcom (USS) segments. Current orderbook offers 2.5 years of revenue visibility.
• New contract details. The new shipbuilding contract for a leading oil & gas company is for a 97-metre W2W vessel, which will be able to accommodate 106 persons. The vessel will feature an advanced motion-compensated gangway to ensure safe personnel transfers in varying sea conditions and a 10-tonne crane with active heave compensation for more effective load handling in rough seas. The vessel is expected to be completed by 1H27. The contract win marks STE's expansion into the market for specialised vessels supporting offshore operations.
• Expecting a strong end to 2024. For 2H24, we estimate STE to report revenue of SGD5.7bn (+8.2% YoY, +2.7% HoH) and a reported PATMI of SGD343m (+12.2% YoY, +1.9% HoH). Based on our latest estimates, STE's 3Q24 revenue of SGD2.8bn (+14% YoY) accounted for 49% of our 2H24F. Also, our 4Q24 revenue estimate of SGD2.9bn is a tad ahead of STE's 4Q24 order delivery guidance of SGD2.6bn for the same period to account for revenue from within-quarter business. We also expect STE to announce 4 SG cents of dividend for 4Q24. Based on our current estimates, we assess that STE has the ability to pay higher dividends. Our unchanged TP includes a 4% ESG premium over the fair value.
• Remain upbeat on the outlook; keep STE in your portfolio. Our expectation of strong profit growth in 2024-2026 is supported by the CA, STE's second-largest segment by revenue. Growth in the CA segment will be aided by continued strong demand for aviation MRO work and continued deliveries of its passenger-to-freighter (PTF) aircraft. We maintain that the USS segment should see the fastest growth in 2023-2026F in terms of EBIT CAGR, aided by a turnaround in the satcom business. Sustained delivery of defence contracts should support growth for the defence & public security (DFS) segment. We believe STE, with its relatively strong earnings growth and a defensive dividend payout, should be part of every Singapore investor's portfolio, especially given the uncertain near-term macroeconomic environment.

Source: RHB Research - 21 Jan 2025