SINGAPORE TECH ENGINEERING LTD (SGX:S63)
ST Engineering - Resilient In Challenging Times
1H22 broadly in line; near term cost pressures to drag
- ST Engineering (SGX:S63)'s 1H22 PATMI of S$279m (-6% y-o-y) is in line with our and below consensus estimates, accounting for 50% and 49% of FY22F estimate respectively. Excluding the TransCore transaction and integration expenses, Group PATMI would have been S$307m (+4% y-o-y).
- We trim our FY22-24F earnings forecast for ST Engineering by 5-6% to factor in TransCore acquisition expenses and rising cost pressures. We expect sequential earnings recovery from Urban Solution & Satcom (USS) segment in 2H22F as the bulk of transaction expenses were booked in 1H22.
- Our target price for ST Engineering is correspondingly cut 5% to S$4.50 (DCF at WACC 7.3%, TGR 2% unchanged).
Underlying business ticking along as expected
- ST Engineering's 1H22 topline grew 6% h-o-h on higher contribution from
- Commercial Aerospace (CA) +6% h-o-h,
- Urban Solution & Satcom (USS) +14% h-o-h and
- Defence and Public Security (DPS) +3% h-o-h.
- We expect 2H22 to be better (+8% y-o-y) with greater contribution from TransCore and gradual aviation recovery. Including a one-time S$72m pension restructuring, group EBIT improved to S$384.6m (+8% y-o-y) due to a stronger operating performance, backed by cost savings.
- ST Engineering's balance order book is at an all-time high of S$22.2b with cS$4.4b expected to be recognised in 2H22.
Earnings powered by Aerospace recovery
- Commercial Aerospace (CA) segment saw EBIT increase 22% y-o-y (excluding one-time pension restructuring) in 1H22 given continued recovery in international air traffic. On the back of more PTF executions and MRO volumes, we believe strong operating leverage could preserve segment EBIT margins at 7.8% and achieve EBIT of S$312m in FY22F.
- Urban Solution & Satcom (USS) segment recorded EBIT loss of S$12.1m (-210% y-o-y) mainly due to the front-loaded transaction and integration cost of the TransCore acquisition. As such, we see softer operating profit margin of 7.4% (FY21: 8.5%) in FY22F. Despite a stronger performance, defence business EBIT declined (11% y-o-y) due to absence of government support; but we expect recovery (+8% y-o-y) with healthy orders in 2H22.
Cautious outlook weighed by acquisition costs
- We remain optimistic on ST Engineering’s growth prospects given
- Continual recovery in Aerospace,
- strong contribution from TransCore acquisition,
- contract win momentum remains strong and
- robust order book (+4.2% q-o-q) which provides healthy revenue visibility for the next few years.
- However, we are mindful that short-term margins could continue to hurt by rising operating expenses and front-loaded acquisition expenses (1H22: S$11.2m) coupled with lingering uncertainty over the global chip shortage.
- See
- Re-rating catalysts: strong defence order wins and quicker aerospace activity recovery.
- Maintain BUY recommendation on ST Engineering.
Kelvin Tan
Maybank Research
|
https://www.maybank-ke.com.sg/
2022-08-14
SGX Stock
Analyst Report
4.500
SAME
4.500
