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Making All The Smart Moves

  • Five-year outlook unveiled – STE plans to reach S$11bn in revenues by FY26, implies a 7% CAGR over FY20-26
  • Smart city-related revenues expected to be as big a contributor as commercial aerospace by FY26
  • Organic growth trends look much more exciting than in the recent past, STE no longer just a yield play
  • Maintain BUY with slightly higher TP of S$4.60
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Investment Thesis:

Upswing in Growth trajectory. In the near term (FY21-23), we expect solid 10% CAGR in net profit, driven by inorganic growth (TransCore) and recovery in commercial aerospace segment. However, the big story is that instead of revenue stagnation (between FY12-FY18), growth momentum will continue, build on the solid foundation established since 2018. With continued investments in R&D and strategic acquisitions, STE remains well on top of crucial global needs of digitalisation, urbanisation, sustainability and security, which will drive robust organic growth across segments of at least 4-5% even further out in this decade to 2026. Key to this will be 1) the strong ramp-up in Passenger to Freighter (P2F) conversions, 2) continued traction in the smart city space – smart mobility, smart environment and smart security, 3) expansion in digital businesses including cloud, AI analytics, and cybersecurity and 4) international defence contract wins, among others.

Record order backlog underpins earnings visibility. 
The order backlog for STE reached a new record level of S$18.2bn as at end-9M21, as new order wins surpass expectations.

Inorganic growth can provide further impetus. 
STE can leverage its strong balance sheet to ensure more debt-funded acquisitions. Despite the expected increase in gearing, we envisage limited impact on funding costs.

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Valuation:
Our TP is revised up slightly to S$4.60 as we roll over to FY22 valuations. The TP is based on a blended valuation framework (P/E, dividend yield, and DCF). Stock offers decent yield of 3.8% and potential to ride on stronger growth going forward.

Where we differ:
We are more conservative on FY22 earnings compared to consensus (likely related to pace of aerospace recovery), but we are more bullish on the recovery thereafter.

Key Risks to Our View:
Slower than-expected demand recovery in international air travel could pose downside risk to earnings and valuations.

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