ST Engineering Earnings: Robust Order Book, Product Mix Lift Earnings Outlook; Raising Fair Value

ST Engineering’s S63 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.

With the restructuring of its satcom business largely completed, and with no other one-off disposal loss expected, we raise our net profit estimate for 2023 by 10% and for 2024-25 by 4%-6%. As a result, we now see EPS growth of 9.8% in 2023, 18% in 2024, and 20% in 2025. Growth in 2024-25 earnings reflects our expectation for continued strength in aerospace maintenance, passenger-to-freight conversion expansion, TransCore’s new projects, and operating leverage benefits. Our fair value estimate rises to SGD 4.72 per share from SGD 4.60, pricing STE at 21 times 2023 price/earnings and 12.2 times enterprise value/EBITDA, within its historical trading range.

We are seeing STE benefit from industry tailwinds as well as recent portfolio moves. Delayed aircraft deliveries point to robust demand for aircraft maintenance as airlines keep older fleets in the air, given high passenger load factors. The sale of loss-making U.S. marine activities in the fourth quarter of 2022 helped lift June-quarter EBITDA margin by 30 basis points to 14.6% from the year-ago level. If not for the satcom segment loss of SGD 52 million, which includes a SGD 24 million divestment loss, first-half operating profit growth may have hit 31% year on year instead of 13.6%. The intensified competition in the satcom industry had already been factored into our assumptions, but the impact from supply disruptions is lingering longer than expected. STE has streamlined its satcom business and expects cost savings to materialize in 2024.