Defensive giant in trying times
? 1Q22 revenue returned to pre-Covid-19 levels of S$2bn. Transcore
acquisition bearing fruit with S$1.6bn addition to STE’s S$21.3bn order book.
? Active product redesign, supply chain management and some cost passthrough to customers mitigate inflationary and chip shortage pressures.
? S$0.04 quarterly DPS declared. Catalysts: quicker global border reopening
and strong orders in digital/smart city. Add; blended valuation TP at S$4.70.
Transcore added S$1.6bn of orders to S$21.3bn order book
1Q22 order wins were decent at S$2.4bn (-25% qoq, +54% yoy) with the largest portion
(S$1.3bn) coming from Defence and Public Security (contracts include AI systems and
digital solutions), followed by Commercial Aerospace (S$900m) and Urban
Solutions/Satellite Comms (S$200m). The consolidation of Transcore from 17 Mar also
contributed S$1.6bn of orders into STE’s order book, now at a new high of S$21.3bn
(4Q21: S$19.3bn), of which c.27% are expected by STE to be delivered by end-FY22F.
Group revenue of S$2.0bn (+14% yoy) was in line and formed 23% of our FY22F
forecast and Bloomberg consensus.
Commercial Aerospace 86% of pre-Covid, steady flow of PTF orders
Commercial Aerospace (CA) revenue rose to S$674m (+22% yoy) in 1Q22. Airframe
MRO has seen full recovery from strong execution of passenger-to-freighter (PTF) orders
while components and engines are operating at 80% of pre-Covid-19 capacity with better
recovery from 2H22 as borders reopen. The demand for PTF has normalised with some
orders still seen in 1Q22 for A330 PTF from DHL and CDB Aviation. Nacelle production
remains steady with 43 units/month YTD (1Q21: 40 units/month) with a target to ramp up
to 53 units/month by end 2022. We expect defence and commercial aerospace revenue
to recover to pre-Covid-19 levels by end 2023F.
Focus on digital business growth
Defence and Public Security (DPS) revenue grew 9% yoy to S$1.06bn on the back of
strong growth from its digital systems and cyber business. Revenue from this segment
grew from S$166m in FY20 to S$250m in FY21 and is on track to achieve more than
S$500m by FY26F (upside potential if more projects are won). STE’s advantage lies in its
end-to-end system integration capabilities for mission critical government and defence
projects, that can be cross-sold to large commercial enterprises.
Active management to protect rising costs
STE issued US$1bn bonds (US$700m due in 2027 and US$300m due in 2032) to
refinance USCP for the acquisition of Transcore and with favourable settlement of
Treasury Locks gain of c.US$91m (to be amortised over the periods of the bonds),
resulting in weighted average interest cost of 1.8% p.a. We cut FY22-24F EPS by 2-3%
to factor in inflation and rising interest rates although STE sees minimal impact for now.
Our blended valuations TP is based on 20.7x FY23F P/E, DCF, and 4% dividend yield.