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Powerhouse target

■   We estimate 8-11% profit CAGR by FY26F for STE to reach S$810m-S$960m, as STE is targeting revenue growth of 2-3x global GDP growth.
■   STE assumes domestic air travel to exceed pre-Covid-19 levels by 2023F, and international air travel by 2024F. ROE to remain strong above 20%.
■   We keep our DPS target of S$0.15 p.a. (c. 3.9% yield) even as net gearing could reach 1.5x after the completion of Transcore acquisition.
■   Reiterate Add. Our TP of S$4.54 is still based on blended valuations (DCF, 20.7x CY22F P/E and 4% dividend yield).

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Revenue and profit CAGR of 8-11% by FY26
On its investor day, STE said it is targeting group revenue to grow 2-3 times of global GPD growth rate by 2026. Net profit will grow in tandem with revenue. This implies revenue target of S$11.5bn-S$13.8bn and net profit target of S$810m-960m by FY26F, based on a net margin of 7% (pre-Covid-19 net margin in 2017-2019). Margin expansion from efficiency and operating leverage could be an upside risk. Other key targets include 1) commercial aerospace revenue to be above S$3.5bn; this is premised on domestic/ international travel recovery by 2023/2024 respectively and global aircraft fleet returning to 2019 levels by 2024, mainly single-aisle aircraft; 2) smart city revenue to double to S$3.5bn; and 3) cloud, AI analytics, cyber business revenue to triple to more than S$500m.

P2F – high growth area; revenue to exceed S$700m by FY26
There are more than 140 aircraft (>60 units of narrow-body and >80 units of medium wide-body) on order for passenger to freighter (P2F) conversion. Order book for conversion is full for mid-2024 to mid-2025. STE targets to double its P2F induction capacity by 2022, from 15 units in 2021, triple by 2023 and reaching more than 60 aircraft by 2026. P2F should achieve an annual revenue of c.S$400 in FY22F and more than S$700m by FY26F. STE also targets to double its aircraft asset management AUM to US$6bn by securitisation.

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Implied smart city revenue to grow by 5-9% p.a.
The successful acquisition of Transcore (scheduled to be completed by 1Q22F) could add c.S$790m of revenue p.a. to STE, helping STE to reach smart city target revenue of S$3.5bn by FY26 (current S$1.7bn). This also implies 5-9% annual growth for both Transcore and STE’s existing smart city businesses. Target excludes any other M&As.

Defence contracts remain a wild card
International defence contract win is a wild card with a total addressable market (TAM) of US$5bn over the next few years, according to the management. STE trades at c.20x FY22F P/E (5-year average), supported by S$5.2bn order wins as of 9M21. It traded up to 24x P/E in FY19 when order wins hit S$8bn. With a quarterly order win run rate of S$1.8bn-S$2bn, we expect STE to close 2021 with c. S$6.7bn of orders. Key catalysts: stronger-than-expected orders, quicker resumption of global travel, earnings-accretive M&A.