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Record high order book of S$18.2bn

  • Order wins healthy at S$1.82bn in 3Q21, driven by commercial aerospace orders (S$1.03bn). Order book at record high of S$18.2bn (2Q21: S$16.8bn).
  • Commercial aerospace revenue up 27% yoy in 3Q21 due to MRO recovery and strong PTF demand. PTF capacity expansion currently in progress.
  • STE achieved c.80% of its S$180m target in cost savings. STE ’s investor day on 16 Nov 2021 to provide a deep dive on segments and 2026 targets.
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Order win momentum going strong, cost savings on track

STE recorded healthy 3Q21 order w ins of S$1.82bn (+7% yoy, flat vs. 2Q21 S$1.82bn), comprising S$1.03bn in Commercial Aerospace (CE), S$413m in Defence & Public Security and S$382m in Urban Solutions & Satellite Communications (USS). 3Q21 order wins exclude contracts which are commercially sensitive which w e estimate to be as high as S$600m-750m. Order book reached a record high of S$18.2bn (vs. 2Q21 S$16.8bn), w ith S$1.9bn expected to be recorded in 4Q21F. STE has achieved 80% of its S$180m in cost savings in FY21 as part of the group’s efforts to offset the FY20 S$250m in grants.

MRO works ramping up, PTF capacity expansion is ongoing

Revenue from CE came in at S$607m (+4% qoq, +27% yoy) in 3Q21 on the back of 1) greater MRO recovery from increasing international flights, and 2) strong demand for passenger-to-freighter (PTF) conversions. On the PTF front, STE is fully booked for A320/A321 conversions through mid-2024 and has some bookings for A330 conversions through mid-2025, w ith 30 PTF induct ions expected in 2021 and more than 55 PTF expected in 2022. In 3Q21, the division w on 18 units of A320/A321 PTF contracts from aircraft lessor BBAM. The group intends to open a new PTF conversion facility in the US by end-FY21F and two new facilities (1 in the US, 1 in China) by end-FY22F. Capacity utilisation for the CE segment improved qoq to 80% (vs. 67% in 1H21), with airframe at c.90% and engine & components at c.70%.

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USS margin pressure from chip shortage; defence projects on track

The ongoing semiconductor chip shortage has impacted STE’s USS segment. EBIT margin for USS could be under pressure in the near term (1H21: EBIT margin w as 2%). That said, w e still expect healthy USS order wins given STE’s established incumbency in the industry. Notable USS projects won in 3Q21 include modernisation of Singapore’s ra il communication systems (rail solutions) and implementation of smart lift monitoring solutions for lifts in Singapore (Io T). STE’s cold weather all-terrain vehicle prototype with Oshkosh Defence for the US Army has completed summer trials and is now going into winter trials, with more clarity expected by mid-2022.

Reiterate Add with a TP of S$4.54, look out for investor day

The acquisition of TransCore is undergoing regulatory review s and likely to be completed in 1Q22F. Our TP of S$4.54 is still based on blended valuations (DCF, 20.7x CY22F P/E and 4% dividend yield). Re-rating catalysts: stronger-than-expected orders and quicker resumption of global travel. Downside risks include border lockdowns.