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ST Engineering Ltd – All Engines Roaring, But Satellite No Signal

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Publish date: Tue, 14 May 2024, 04:44 PM
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  • 1Q24 revenue update was within our expectations at 25% of our FY24e. Revenue grew an impressive 18% YoY to S$2.7bn. Around 2/3 of the growth was from commercial aerospace revenue that jumped 32% YoY to S$1.1bn.  1Q24 DPS was 4 cents unchanged. 
  • Rising aircraft flying hours, slower introduction of new engines, and increased capacity boosted revenue in aircraft MRO. Defence and public security revenue rose 14% YoY from increased demand for digital services and higher munitions sales. Satellite operations is still looking to transition customers to its multi-orbit next-gen platform.
  • We nudge our FY24e earnings by 3% to S$713mn. We expect revenue momentum and operating leverage to build up in the remaining quarters. Our DCF TP is raised to S$4.90 (prev. S$4.50). ST Engineering is enjoying multiple growth drivers backed by a record orderbook of S$27.7bn. Earning growth is supported by aircraft MRO, passenger-to-freighter conversion, A320 nacelle engine production, increased defence spending, and migration of enterprises into secured cloud and cybersecurity solutions.

 

 

The Positives

+ Aircraft MRO remains the growth driver. Commercial aerospace (CA) registered a 32% YoY jump in 1Q24 revenue to S$1.2bn. Growth was broad-based and led by aircraft MRO (Maintenance, Repair, and Overhaul). With longer flying hours, MRO work is rising on engines, airframes, and other components. Delays in aircraft deliveries will further push the lifecycle of the existing aircraft fleet.

+ Broad-based growth in defence and public security (DPS). DPS revenue expanded 14% YoY to S$1.1bn. International defence revenue has grown from munition sales, C130 support services, Unmanned Surface Vehicles and Terrex deliveries. Another leg of growth in DPS stems from digital services (cloud, AI, and cybersecurity). Customers seek secure hybrid cloud solutions where DPS supports migration and cybersecurity requirements.

 

The Negative

– Satcom is still a work in progress.  Satcom has reduced its cost base but while transitioning customers to a multi-orbit next-gen platform. The rebranding only occurred in March. We expect a gestation period for customer acceptance.

 

Outlook

Earnings growth will be driven by CA and DPS. There is also earnings visibility with the record S$27.7bn in order books. Urban Solutions and Satcom (USS) will be the weakest of the 3 segments as Satcom undergoes a product refresh. Nevertheless, USS earning is expected to recover in 2024 from the realignment of cost at Satcom and earning contribution from TransCore with project deliveries.

Maintain ACCUMULATE with a higher TP of S$4.90 (prev. S$4.50)

We nudged our FY24e earnings by 3% and raised our TP from S$4.50 to S$4.90.

Source: Phillip Capital Research - 14 May 2024

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