1H22F: welcoming TransCore to the family
- We expect STE to report 1H22F net profit of S$250m (-15% yoy), with stronger revenue (+18% yoy) but weaker EBIT (-4% yoy).
- CA and USS to see strong revenue growth. However, margins could be affected by rising cost pressures and front-loaded acquisition expenses.
- We trim our FY22-23F EPS by 3-4% to factor in higher opex. Our TP is reduced to S$4.58, still based on blended valuations (Figure 8).
1H22F preview: better topline weighed by acquisition expenses
We forecast net profit of S$250m (-9% hoh, -15% yoy) in 1H22F, with weaker earnings due to TransCore acquisition expenses and rising cost pressures. We then expect sequential earnings recovery from 2H22F onwards as we believe the bulk of transaction expenses were booked in 1H22F. We project revenue of S$4.3bn (+7% hoh, +18% yoy), driven by 1) Commercial Aerospace (CA): recovering global flight activity, and 2) Urban Solutions & Satcom (USS): contribution from newly acquired TransCore. Re-rating catalysts: strong defence order wins and quicker aerospace activity recovery. Downside risks include rising cost pressures and border closures.
CA: stronger volumes expected amid global recovery
CA clinched three maintenance, repair and overhaul (MRO) contracts in 2Q22; these include the provision of services for United Airlines, Safran Aircraft Engines, and Turkish Airlines. According to IATA, global passenger air traffic recovered to 69% of pre-Covid-19 levels in May 22, driven by strong recovery in international air traffic. We forecast 1H22F CA revenue growth of 25% yoy on the back of more PTF executions and stronger MRO volumes. We believe strong operating leverage could preserve segment EBIT margins hoh at 5.5% in 1H22F (vs. 1H21: 7.9%) and forecast 1H22F EBIT at S$78m.
USS: TransCore acquisition expenses front-loaded in 1H22F
We expect 1H22F USS revenue to rise 58% yoy, driven by 1) contribution from newly acquired (in mid-Mar 22) TransCore, and 2) increasing traction for smart city solutions. From TransCore, we estimate revenue contribution of c.S$225m (c.27% of 1H22F USS revenue) to STE in 1H22F, taking into account only c.3 months of contribution. We see a weaker USS OPM of 2.0% in 1H22F (vs. 1H21: 3.0%) as we expect STE to front-load its transaction and integration costs.
Defence segment could boost order wins
STE recently signed three agreements with Saudi Arabian Military Industries (SAMI), a subsidiary of Saudi Arabia’s Public Investment Fund. STE will provide defence-related supplies and services for SAMI; no information was given on contract sizes. SAMI aims to localise 50% of Saudi Arabia’s total government military spending and is targeting to be among the top 25 largest defence companies globally by 2030. We see potential for further upside to STE’s defence order wins given Saudi Arabia’s large defence spending (Fig 4) and ambitious long-term goals set by SAMI.