• Reiterate BUY and 5.32 TP, 19% upside and c.4% yield. 3Q24 revenue of SGD2.8bn (+14% YoY) accounted for 52% of our 2H24F. While the other segments reported YoY revenue growth, urban solutions & satcom (USS) revenue declined 5% amidst the weak satcom business. In line with our expectation, the 3Q24 contract wins momentum has softened with SGD2.2bn (-2% YoY, -29% QoQ) in order wins. We remain upbeat on ST Engineering’s revenue and profit momentum and expect it to deliver a 15% profit CAGR and steady dividends in 2023-2026.

• 3Q24: excluding USS, all businesses reported revenue growth. On a YoY basis, commercial aerospace (CA) and defence & public security (DPS) reported 7% and 31% revenue growth. DPS growth was aided by strong order deliveries for across key sub-segments. CA saw strong growth in the engine MRO business as delay in deliveries of new aircraft has led to airlines using older aircraft for longer. This has in turn led to lower availability of feedstock for passenger-to-freighter (PTF) business. Despite the likelihood of reduced PTF volume in the near term, STE reiterated its mid-single-digit EBIT margin by end 2024 and SGD700m revenue guidance by 2026 for the PTF business. STE’s hangars are operating at 90% utilisation levels, and it is repurposing some of its PTF capacity to meet increased MRO demands. STE’s hangar capacity will be 20% higher by 2024 and 30% higher by 2026 as compared to pre-COVID-19 levels. For USS, although revenue was down YoY, STE reiterated that the business segment’s 2H24 revenue will be higher as compared to the same period last year. CA, DPS, and USS 3Q24 revenue accounted for 55%, 59%, and 42% of our 2H24F.

• Decent order wins. STE reported SGD2.2bn of order wins in 3Q24. Only USS registered YoY and QoQ growth in order wins. The company's outstanding orderbook stood at a record high of SGD26.9bn, providing close to 2.5 years of revenue visibility. In addition to order deliveries, the decline in outstanding orderbook was also due to FX translation, as close to a third of the orders are in USD. SGD2.6bn worth of orders are expected to be delivered in 4Q24. This compares with our revenue estimate of SGD2.6bn for the same period.

• Interim dividend declared; upside from lower interest rates. STE declared an interim dividend of 4 SG cents. It has an outstanding debt of SGD6bn, of which 63% is at a fixed interest rate. With expectations of lower interest rates in 2025, we estimate that a 100bps reduction in interest costs will boost profit by 2%. We continue to derive our TP using an average of P/E, P/BV, EV/EBITDA, and DCF. It also includes a 4% ESG premium given STE’s 3.3 ESG score vs the 3.1 country median.

Source: RHB Securities Research - 19 Nov 2024