• ST Engineering’s 9M22 revenue of S$6.5bn was in line, accounting for 74% of our 2022 estimate. It reported strong order wins in 3Q22, with an outstanding order book (excluding the US marine business) of S$23.1bn at an all-time high. TransCore’s latest contract delivery is expected to start in 2024.
• Despite some concerns about higher interest costs, we continue to like ST Engineering for its strong revenue visibility and a defensive dividend outlook. We expect it to deliver a 8% profit CAGR in 2022–2024F.

All ST Engineering's Business Segments Reported Y-o-y Growth

• ST Engineering (SGX:S63) reported 3Q22 revenue of S$2.2bn (+22% y-o-y, unchanged q-o-q). On a y-o-y basis, all businesses reported revenue growth:
  • Commercial Aerospace (CA) (+28% y-o-y),
  • Urban Solutions & Satcomm (USS) (+74% y-o-y), and
  • Defence & Public Security (DPS) (+5% y-o-y).
• However, on a q-o-q basis, growth in CA revenue (+6% q-o-q) was offset by lower USS (-2% q-o-q) and DPS (-3% q-o-q) revenue. CA revenue growth was driven by higher demand for nacelle deliveries, MRO services, and passenger-to-freighter (PTF) conversions.
• ST Engineering’s PTF conversion slots are booked until 2025-2026 but the rate of growth is expected to slow down in the near term.

Strong Order Wins

• ST Engineering reported S$4.8bn (+163% y-o-y, +56% q-o-q) of order wins in 3Q22. Excluding S$1.9bn in orders related to ST Engineering's US marine business, which it intends to divest, the company's outstanding order book stood at an all-time high of S$23.1bn, providing over two years of revenue visibility.
• Urban Solutions & Satcomm (USS) reported S$2.0bn (+424% y-o-y, +388% q-o-q) of order wins, followed by S$1.8bn (+336% y-o-y, +25% q-o-q) by Defence & Public Security (DPS) and S$1.0bn (-3% y-o-y, -18% q-o-q) by Commercial Aerospace (CA).

Capital Optimisation Plans

• ST Engineering reported a gross debt of S$6.8bn as at end-3Q22, of which 46% (S$3.1bn) was based on floating rates. The q-o-q increase in debt was attributed to an increase in the aviation asset business and the US$'s appreciation vs S$. ST Engineering intends to term out US$500m-700m of its floating rate debt via longer-term fixed coupon bonds or loans.
• ST Engineering shared that it would look at securitising several hundred million (~S$500m) worth of aviation assets in the next few months to pare down its debt. It will also continue to optimise its net working capital and divest non-core businesses.

Steady Dividend Outlook

• ST Engineering declared a quarterly dividend per share of 4 cents.
• We continue to derive our target price for ST Engineering using an average of P/E, P/BV, EV/EBITDA, and DCF. The target price includes an 8% ESG premium over the fair value of S$3.85.

• Maintain BUY recommendation on ST Engineering with S$4.15 target price, 19% upside, with ~4% FY23F yield.

Source: RHB Invest Research - 30 Nov 2022