ST Engineering’s FVE Remains SGD 4.70 Following in Line Results, Growth to Pick Up

We keep our fair value estimate of ST Engineering, or STE, at SGD 4.70 following in line full-year 2021 net profit of SGD 570.5 million. Reduced government grants ate into profitability but this was offset by contained costs. The 9.3% uptick in net profit, year on year, meant that STE is close to being back at prepandemic profit levels although this is boosted by government grants. We look for earnings growth of 4.2% in 2022 in the absence of any further government support and higher effective tax rates. We think 2023 is expected to see a stronger earnings recovery, up 18.0% over 2022 earnings, with a full-year contribution from the purchase of U.S.-based toll road system services provider Transcore, improved operating leverage benefits, and from the recovery in commercial aviation that should drive STE’s maintenance, repair and overhaul, or MRO, services. We continue to see value in narrow-moat STE given our estimate for free cash flow to grow at an average 11% over the next five years.