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.
INITIATE COVERAGE
• Defence portfolio offers stability and growth. As an anchor supplier to Singapore’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’s recovery, negative margin surprises due to project cost
overruns or failure to pass down cost pressure from inflation.
EARNINGS OUTLOOK
• Revenue CAGR of 10.9% in 2022-24. We forecast STE’s revenue to grow by a CAGR of
10.9% in 2022-24. We expect 2022 revenue to reach S$9.6b, a remarkable growth of 24.2%
yoy, driven by both organic business growth across all business segments as well as fresh
contribution from TransCore (acquisition completed on 18 Mar 22). Thereafter, revenue is
expected to grow 6.1% and 3.5% in 2023 and 2024 respectively, mainly due to organic
business growth and higher project deliveries.
• Expect core net profit to be flat yoy in 2022 and grow 16.7%/6.1% in 2023/24. We
conservatively project core net profit to be flat yoy at S$526m in 2022, as we expect the
positive impact from the improving operating performance to be largely offset by the reduction
in government grants. Excluding the effect of government grants, STE’s core net profit would
have risen 64% yoy in 2022 by our estimate. We expect STE’s core net profit to grow 16.7%
and 6.1% in 2023 and 2024 respectively, driven by revenue growth and margin improvement
helped by operating leverage.
VALUATION/RECOMMENDATION
• Initiate coverage with BUY and target price of S$4.60. We value STE using DCF
methodology (WACC: 7.0%, terminal growth: 2.5%). Our target price implies 23.5x 2023F PE,
or 1.3SD above its historical average. This is plausible as STE’s strong orderbook provides
good visibility for growth in the medium term. The target price translates to 11.1% upside
(total return of 15.0% if including the 3.9% yield) over STE’s last close price of S$4.14, which
is at 21.1x 2023F PE, or 0.1SD below its historical average forward PE of 21.3x.
SHARE PRICE CATALYST
• Strong contract win momentum.
• Delivering stronger-than-expected earnings growth.
RISK
• Negative margin surprise due to project cost overruns or failure to pass down cost pressure
from inflation.
• Any event that may disrupt the aviation sector recovery.
• A prolonged global supply chain disruption that may dampen STE’s growth outlook.
• Failure to realise growth and synergies from the acquired entities.