• Reiterate BUY and SGD5.32 TP, 13% upside, and c.3.5% yield. ST Engineering continues to rake up new contract wins. Last week it announced a new SGD60m contract win to deliver a smart city platform for Lusail City, Qatar. We remain positive on STE’s outlook and maintain that the Commercial Aerospace (CA) and Defence & Public Security (DPS) segments will continue to drive growth while the Urban Solution & Satcom (USS) unit should see a potential recovery. STE ought to deliver a 15% profit CAGR and steady dividends during 2023-2026.

• Smart city platform for Lusail City. The contract worth >SGD60m was signed between STE and Lusail Real Estate Development, a subsidiary of Qatari Diar Real Estate Investment. The contract comprises the designing, building, and operating of a cutting-edge smart city platform with citywide connectivity. This project is slated to begin in 4Q24 and last until 2027. Lusail City's digital backbone will be powered by STE's AGIL Smart City Operating System or OS, which incorporates artificial intelligence or AI, machine learning, and data analytics. While the contact size appears to be small, it will add to the contract wins reported by the USS segment in recent quarters, as well as to STE's track record of implementing >800 smart city projects in >150 cities worldwide. We believe continuing contract wins will remain one of the key re-rating catalysts for the company.

• 3Q24 business update. STE will be reporting its 3Q24 business update on 18 Nov. The update will include the reporting of quarterly revenue, business updates, and contract wins for each of its three key segments. We expect the company to maintain the revenue growth momentum witnessed throughout the year, with strong contributions coming from both the CA and DPS segments. We estimate STE to report SGD2.5-2.7bn worth of revenue and SGD2.3-2.5bn worth of order wins in 3Q24.

• Reiterate our positive call. The company’s record order backlog of SGD27.9bn provides c.2.5 years of revenue visibility. In our view, growth for the CA segment will be aided by continued strong demand for aviation MRO work, higher aircraft engine nacelle deliveries, and improving margins for STE’s passenger-to-freighter or PTF conversions. The sustained delivery of defence contracts should also support growth for the DPS segment, and we expect the right-sizing and cost optimisation exercises for the USS division to boost EBIT in the coming years. We estimate that a 100bps reduction in 2025 interest costs will boost profit by 2%. Our TP is derived by using an average of forward P/E, P/BV, EV/EBITDA, and DCF of adjusted free cash flows. It also includes a 4% ESG premium, given STE’s 3.3 ESG score vs the 3.1 country median.

Source: RHB Research - 24 Oct 2024