Smashing new records
? STE surprised positively with strong order wins in 4Q21 (S$3.2bn) and FY21 (S$11.7bn), firming up order book to a record S$19.3bn.
? A change in dividend policy to quarterly payout and a commitment of 16 Scts for FY22F also point to better earnings prospects.
? We estimate full-year contribution from TransCore in FY23F and post-Covid19 recovery across segments could lift STE’s profit above S$700m.
? Recent share price correction offers good buying opportunity as it now trades at 17x FY23F P/E. Reiterate Add with a higher TP of S$4.70.
Record order wins of S$11.7bn in FY21; new dividend policy
STE’s 2H21 net profit of S$274m (-7% hoh, +4% yoy) was in line with consensus but slightly below our expectations on lower hoh margins from Commercial Aerospace (higher investment and accelerated hiring) and Urban Solutions (chip shortage). FY21 net profit of S$571m (+9% yoy) formed 96%/101% of our/consensus forecasts. We were positively surprised by the S$3.2bn of new orders in 4Q21 (vs. 3Q21: S$1.8bn), driven by S$1.8bn of defence contracts (+c.336% qoq) and sustained qoq strength in commercial aerospace at S$1bn. STE also improved transparency with additional disclosures for commercially sensitive contracts clinched in 2021 (implied S$3.3bn in FY21 and S$1.5bn in FY20). Accordingly, orderbook hit a record of S$19.3bn, of which S$6.6bn is expected to be delivered in FY22. 2H21 DPS of 10 Scts (FY21: 15 Scts) was declared with a new dividend policy of quarterly payout and a committed FY22F DPS of 16 Scts (4.2% yield).
Positive Aerospace outlook; P2F works going strong
Commercial Aerospace (CA) continued its recovery in 2H21, with revenue up sequentially for MRO (+8% hoh) and Aerostructures (25% hoh). This was mainly due to a mix of 1) ramp-up in passenger-to-freighter (P2F) works, and 2) stronger OEM deliveries. STE is expanding capacity via construction of two additional facilities located in Mobile (US) and Shanghai (China), which should commence in FY22F. We expect CA’s revenue to grow 13% in FY22F with PTF deliveries doubling in addition to aviation traffic recovery. We expect EBIT margins to gradually improve to 6.8-6.9% in FY22-23F (FY21: 6.6%) on stronger operating leverage, although this is still below pre-Covid-19 levels (9-10%) due to ramping up of PTF lines, higher staff and logistics costs as supply chain tightens. Upside could come from scaled up revenue after new PTF lines are normalised.
Defence is always the wild card; TP lifted to S$4.70; reiterate Add
Assuming commercially sensitive orders above are largely from Defence and Public Security (DPS), the segment won c.S$6bn of contracts in FY21, setting STE apart from Singapore industrial peers. EBIT margins for the segment (c.11% in FY21) are also the highest within STE and a key earnings pillar (c.60% of group EBIT). Our higher TP is still based on blended valuations but on a rolled forward basis (20.7x FY23F P/E, DCF and dividend yield). Key catalysts: quicker resumption of global travel, M&A.