A Fine Balance Of Defence And Growth
Strategically integrated into the defence and security structure of Singapore and a
leading player in several major growth areas (smart city, satcom, commercial
aerospace), STE is a fine balance of defence and growth. Its medium-term growth
outlook is underpinned by a record orderbook of S$21.3b. Re-initiate coverage with
BUY and target price of S$4.60.
• Defence portfolio offers stability and growth. As an anchor supplier to Singpaore’s
Ministry of Defence and an integrated solutions provider to a number of Singapore
governmental agencies, Singapore Technologies Engineering (STE) is a strategic
cornerstone of the country’s defence and security structure. Having demonstrated good
resilience during the pandemic, STE’s defence and public security portfolio is set to grow
in tandem with Singapore’s defence spending and benefit from the growing demand of
international customers amid a volatile global security climate and geopolitical landscape.
• Commercial aerospace portfolio likely to recover fully by end-23. We expect
revenue of STE’s commercial aerospace segment ? comprising mainly aerospace
maintenance repair and overhaul (MRO), freighter conversion, nacelle original equipment
manufacturing (OEM) businesses, etc ? to recover to pre-pandemic levels by end-23.
Promising signs include: a) the high utilisation of STE’s existing airframe MRO capacity,
b) its slots for several freighter conversion programmes having been fully booked till
2024/25, c) Airbus ramping up aircraft production (benefitting STE’s nacelle OEM
business), and d) STE investing in new freighter conversion and MRO capacities.
• Geared to other fast-growth areas. With a comprehensive suite of solutions addressing
the connectivity, mobility, security, infrastructure and environmental needs of cities, STE
is proactively pursuing growth in the global smart city market and is well poised to ride the
rising demand. In addition, as the world’s leading satcom ground segment technology
provider, STE is at the forefront of the satcom sector’s revolution and is well-positioned to
capture business opportunities unlocked by the Low Earth Orbit satellite technology.
• Medium-term growth underpinned by record orderbook. STE’s record orderbook of
S$21.3b at end-1Q22, contributed by all three business segments, provides good
revenue visibility and underpins our revenue CAGR projection of 10.9% for 2022-24. We
conservatively forecast a flat core net profit (excluding one-off gains/losses but including
COVID-19-related government grants) in 2022, as we expect the positive impact from the
improving business performance to be offset by the drop in grants. We expect net profit to
rise 16.7%/6.1% in 2023/24 on organic business growth and higher contract deliveries.
• Re-initiate coverage with BUY. Our 2022 DCF-based target price of S$4.60 implies
2023F PE of 23.5x, 1.3SD above its historical average of 21.3x. Catalysts include a
strong contract win momentum and stronger-than-expected earnings growth. Risks
include any event that disrupts the aviation sector recovery, negative margin surprises
due to project cost overruns or failure to pass down cost pressure from inflation.