Broad based growth levers in place
- 2H21 earnings beat expectations as commercial aerospace division recovers closer to pre-COVID level
- Transcore acquisition is on track; we expect contribution in FY21 to partially offset the c.S$200m drop in government grants
- 16Scts total dividends from FY22, payable quarterly
- Medium term growth prospects intact; maintain BUY with a slightly higher TP of S$4.70
Investment Thesis:
Growth trajectory more exciting. We expect solid 10% CAGR in net profit over FY21-23, driven by inorganic growth (TransCore) and recovery in the commercial aerospace segment. However, the big story is that instead of revenue stagnation (between FY12-FY18), growth momentum will continue, built 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, driving robust organic growth across segments of 4-5% even further out 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 of S$19.3bn as at end-FY21, as new order wins surpassed expectations.
Inorganic ambitions 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.
Valuation:
Our TP is raised slightly to S$4.70 toe factor in slightly higher dividends. The TP is based on a blended valuation framework (P/E, dividend yield, and DCF). Stock offers decent yield of 4.2% as well as potential to deliver stronger growth.
Where we differ:
We are more conservative on FY22F 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.