Company Reports

ST Engineering's first-quarter operating update revealed revenue of SGD 2,704 million, reflecting strong aerospace sales, supporting our thesis for the segment to benefit from capacity added over the past few years as aircraft and engine maintenance, overhaul, and repair demand remains strong. With March-quarter revenue making up 23.9% of our 2024 estimate, and largely in line, we keep our profit forecast unchanged. Our fair value estimate remains at SGD 4.72 per share, placing STE in 4-star territory. Besides aerospace, the defense and public security segment sales are also tracking well, making up 24.6% of our full-year estimate. This has helped offset flat revenue for the urban solutions segment, despite growth in TransCore, which may be attributed to the timing of urban rail projects, as well as continued weakness in the satellite communications business.

We keep our fair value estimate on narrow-moat ST Engineering, or STE, at SGD 4.72 following largely decent 2023 results. Our thesis is unchanged. We expect STE to post relatively strong three-year average earnings per share growth of 15.5% on the back of average 9.9% growth in revenue and operating margin to improve to 9.6% in 2026 from 9.1% in 2023. We expect growth to be underpinned by its commercial aerospace, or CA, and digital systems & cybersecurity activities and improved operating margins in the CA and urban solutions segments. Our earnings forecast is little changed. We remain buyers of STE with our fair value estimate pricing the company on 21 times price/earnings and 3.2% dividend yield, in line with its historical range.

Singapore Technologies Engineering is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold and continues to offload noncore activities to focus on areas that will provide synergies to its key commercial aerospace, defence and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 14%, marking an improvement over the 2.7% prepandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider TransCore and an expansion of its passenger-to-freight, or P2F, activities.

Singapore Technologies Engineering, or STE, is seeing continued orderbook strength, and third-quarter revenue is in line with our expectation. Our forecasts are unchanged, and we leave our fair value estimate at SGD 4.72. We continue to like STE given around a 24% upside to our fair value from its Nov. 9 closing share price. We keep our thesis that STE should see 2023-27 earnings CAGR of 13.7% due to the expansion of its aerospace maintenance, repair, and overhaul, or MRO, facilities, and contributions from U.S.-based tolling solutions company TransCore.

ST Engineering’s first-half results were generally decent, with a record-high order book of SGD 27.7 billion on SGD 9.5 billion in new contracts pointing to full-year revenue with room for upside. The healthy order book affirms our narrow moat rating. Absent ongoing challenges at its satellite communications segment, profit would have surpassed expectations. We continue to like STE at the current price level.

Singapore Technologies Engineering is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold and continues to offload noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 15%, marking an improvement over the 2.7% prepandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider TransCore and an expansion of its passenger-to-freight, or P2F, activities. The latter will help drive earnings growth after 2024.

Singapore Technologies Engineering experienced a 29.5% year-on-year recovery in its first-quarter commercial aerospace activities that helped drive group revenue up 12.6% year on year. We believe STE is on track to meet our full-year 2023 revenue growth estimate of 11.3%. First-quarter revenue of SGD 2,289 million makes up 22.8% of our full-year estimate, in line with historical seasonal contribution. No profit details were provided. The main positive is the very strong orderbook wins during the period. This affirms our narrow moat rating. STE’s outstanding orderbook is now at SGD 25.4 billion, which implies solid revenue visibility through first-quarter 2025. We keep our fair value estimate at SGD 4.60 and we remain buyers of the shares.

Singapore Technologies Engineering, or STE, is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold and continues to offload noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 13%, marking an improvement over the 2.7% prepandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider, TransCore and an expansion of its passenger-to-freight, or P2F, activities. The latter will help drive earnings growth after 2024.

We lower our fair value estimate on narrow-moat ST Engineering, or STE, to SGD 4.60 from SGD 4.74 following its full-year 2022 results that revealed higher capital expenditures, debt, and amortization costs than we anticipated. We remain upbeat on the coming few years for its operating and free cash flow outlook on the airline industry recovery and particularly as loss-making projects and entities are divested or closed. STE trades on 4.5% dividend yield presently, and we think it may benefit from a pick up in investor interest once the federal-funds rate shows signs of peaking.

Singapore Technologies Engineering, or STE, is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold and continues to offload noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 13%, marking an improvement over the 2.7% pre-pandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider, TransCore and an expansion of its passenger-to-freight, or P2F, activities. The latter will help drive post-2024 earnings growth.

Our fair value estimate and earnings estimates for ST Engineering, or STE, are unchanged with its acquisition of Keppel Corp's Gul Road shipyard within its budgeted capital expenditures. The SGD 95 million cost is for an existing, operational facility, saving time and effort for a newbuild. We assume STE's 2023 capital expenditures will be SGD 352 million, which is slightly higher than management guidance for around SGD 300 million. We continue to like STE at the current share price level and expect earnings growth to pick up from 2024 as the acquisition of Transcore is digested. We expect underlying aerospace activities to post a decent five-year 15.9% top-line compounded annual growth rate to 2026.

We maintain our fair value estimate on ST Engineering, or STE, at SGD 4.74 per share following its third-quarter update that showed revenue for the nine months to end-September reached SGD 6.5 billion, making up 72% of our full-year 2022 estimate. The orderbook remains strong and is now SGD 25.0 billion, moving up from SGD 18.2 billion at end 2021. With the firm indicating that it should realize SGD 2.5 billion of this orderbook in fourth-quarter 2022, we’re confident that it should meet our expectations. We continue to like the firm at the current price level and see its recent sale of its U.S. marine operations as a step to improve its capital allocation, while a material contract win by recently acquired U.S. tolling operations subsidiary TransCore reinforces STE’s narrow moat rating.

ST Engineering's, or STE's, interim results were largely within our expectation with slightly stronger commercial aerospace, or CA, segment performance offset by weaker urban solutions and satcom, or USS, segment margins. The performance supports our thesis that CA recovery, driven by a rebound in international travel and robust demand for passenger to freighter conversions, will support profit in 2022 and over the next few years. The stronger CA contribution is helping to offset costs related to the acquisition of TransCore and the absence of any pandemic related government grants. The defense and public security segment is generally stable. We make marginal changes to our profit forecast, raising revenue to reflect stronger CA aerostructures growth but lowering USS margins. The net impact is a minimal 1.5% uptick to our 2022 net profit to SGD 580.8 million. However, we push back stronger margin recovery to 2024 from 2023 to reflect possible recession risks and lingering cost pressure. This leads to an 8.4% cut in our 2023 net profit to SGD 633.0 million, but a 4.8% hike in 2024 to SGD 790.0 million. There is little change to our projected 12.3% 2021-26 net profit CAGR.

The coronavirus impact aside, Singapore Technologies Engineering, or STE, is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 12%, marking an improvement over the 2.7% pre-pandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider, TransCore and an expansion of its passenger-to-freight, or P2F, activities. The latter will help drive post-2024 earnings growth.

ST Engineering's, or STE's, first-quarter 2022 revenue grew 13.4% year on year to SGD 2.0 billion, tracking within our full year estimate of SGD 8.9 billion, supporting our assumptions for a pickup in growth. There was immaterial contribution from U.S. toll road services provider TransCore, with the acquisition only completing in the latter half of March 2022. While there were no major surprises, the underlying update was largely positive as it appears the recovery in aircraft maintenance, repair and overhaul, or MRO, activities is at a slightly faster pace and could reach pre-pandemic level by end-2023, ahead of our 2024 estimate. Also, if revenue growth for its defense and public security segment maintains at the first quarter pace of 8%-9% year on year, there could be around a total 5% upside to our group revenue forecast in 2022 and 2023, although we think some of this upside may be currency related.

We tweak our assumptions for ST Engineering’s, or STE’s, profit outlook, leading to a rise in our post-2024 earnings forecast by an average 9%. Our fair value estimate rises to SGD 4.82 from SGD 4.70. STE is attractive at the current share price level based on our expectation that earnings growth will pick up to average 12.2% through 2026 driven by the acquisition of TransCore, strong freighter conversion demand and a rebound in global travel. For longer-term investors, STE’s shares remain attractive. However, despite robust revenue growth of 16.0%, 2022 net profit is projected to be flat on higher depreciation, interest expense and the absence of government job grants.

The coronavirus impact aside, Singapore Technologies Engineering, or STE, is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 12.2%, marking an improvement over the 2.7% pre-pandemic 10-year average, which reflects the pandemic recovery as well as the purchase of U.S. toll road services provider, TransCore and an expansion of its passenger-to-freight, or P2F, activities. The latter will help drive post-2024 earnings growth.

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.

The coronavirus impact aside, Singapore Technologies Engineering, or STE, is driving growth through improved utilization of its capital alongside a plan to contain costs. It has sold noncore activities to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing a five-year compound annual growth rate of 9.3%, marking an improvement over the 2.7% pre-pandemic 10-year average, which reflects the pandemic recovery as well as the pending completion of its purchase of U.S. toll road services provider, TransCore. We think STE has managed pandemic risks well given its diverse portfolio that helped offset SGD 1 billion in contract cancellations. We expect STE to rebound along with the travel industry in the next 24 months, and STE's mid-term outlook remains positive.

ST Engineering, or STE, updated its five-year plan revealing it will target revenue and profit growth at two to three times GDP pace, taking revenue to more than SGD 11 billion in 2026. This is around a year slower than our base-case view as we look for 2025 revenue to hit SGD 11.6 billion and we think our current estimate for revenue to reach SGD 12.3 billion in 2026 is within reach. As a result, we don’t expect to make material changes to our assumptions especially given guidance that planned capital expenditure will average SGD 320 million over the five years, which is below our current forecast, and implies a stronger free cash flow. Hence our fair value estimate remains at SGD 4.70. We see better value in STE relative to Singapore Airlines for a travel recovery play.