ST Engineering - RHB Invest 2022-08-15: Still Optimistic On The Outlook; BUY


ST Engineering - Still Optimistic On The Outlook; BUY

  • ST Engineering (SGX:S63) should deliver defensive growth, aided by a revival in global aviation traffic, gains from growing demand for smart-city solutions, and rising global defence spending. While 1H22 core earnings were below expectations, its strong order wins and record-high orderbook should keep investors interested.
  • While recent M&A increased ST Engineering's operating costs and debt burden, we believe the acquired businesses will support medium-term profit growth. We expect 8% core profit CAGR in 2021-2024F.

ST Engineering's 1H22 core profit was below expectations.

  • While profit of S$280m accounted for 46% of our estimates, it included a pre-tax one-off pension restructuring gain of S$72m. Core net profit of S$226m (-18% h-o-h, - 24% y-o-y) accounted for 37% of our estimates.
  • Commercial Aerospace (CA) continued to register revenue growth (+24% y-o-y) in 1H22, aided by increased MRO services and nacelle deliveries. ST Engineering shared that while airframe MRO hangars are full, engine and component MRO business should continue to recover in 2H22.
  • The key margin disappointment came from the Urban Solutions & Satcom (USS) segment, which reported EBIT loss amidst transaction and integration costs for TransCore and impact from chip shortages.
  • ST Engineering announced an interim dividend of 4 cents.

Strong order wins and record orderbook.

  • ST Engineering won new contracts of S$3.1bn in 2Q22 (+69% y-o-y, +28% q-o-q). Strong order wins were reported by its Defence & Public Security (DPS) and CA businesses.
  • ST Engineering reported its highest order backlog of S$22.2bn, which implies a book-to-bill ratio of 2.7 years – S$4.6bn of this order book is expected to be delivered in 2H22, representing 100% of our 2H22 revenue estimates.

Higher near-term costs from TransCore acquisition.

  • Urban Solutions & Satcom (USS) segment revenue increased S$757m (+14% h-o-h, +43% y-o-y) aided by contribution from the TransCore acquisition and higher smart city deliveries. However, the business registered an EBIT loss amidst:
    • TransCore transaction and integration expenses of S$21m,
    • lower government support of S$3m and
    • weaker performance of Satcom, caused by semiconductor chip shortages.
  • TransCore is expected to keep operating costs elevated (annual integration costs of S$10m) as well as the debt burden (additional S$700m of borrowings). We believe TransCore will also support ST Engineering’s medium-term profit growth in the USS business.

Adjusting earnings forecast for ST Engineering

Shekhar Jaiswal RHB Securities Research | https://www.rhbgroup.com/ 2022-08-15
SGX Stock Analyst Report BUY MAINTAIN BUY 4.60 DOWN 4.800