Weakness has likely bottomed out
- Strong 2Q22 order wins of S$3.1bn drove order book to a new high of S$22.2bn. 4-Sct interim DPS approved, in line with quarterly dividend policy.
- Core net profit of S$208m (-30% yoy) was below our expectations on weaker USS margins. CA margins surprised positively due to good cost control.
- We believe core earnings should have bottomed out in 1H22. With our new lower EPS assumptions, our TP is lowered slightly to S$4.53.
Strong order win momentum drove order book to a new high
Excluding one-off pension restructuring gain of S$72m, core net profit of S$208m (-24% hoh, -30% yoy) was below our expectations and formed 36% of both our and Bloomberg consensus’ full-year forecasts. The miss was due to weaker Urban Solutions & Satcom (USS) margins, attributed to: 1) TransCore transaction and integration expenses of S$21m, and 2) impact from chip shortages. 2Q22 order win momentum was strong at S$3.1bn (vs. 3Q21: $1.8bn), driven largely by Defence and Commercial Aerospace (CA) orders. Order book is at a new high of S$22.2bn as of end Jun 22, of which S$4.6bn is expected to be delivered in 2H22F. The group approved an interim DPS of 4 Scts.
Aerospace margins were a positive surprise
CA continued to recover in 1H22, with revenue growth of 24% yoy driven by increased MRO services and more nacelle deliveries. Even after stripping out one-off gains, 1H22 CA EBIT margin was decent at 7.9% (flat vs. 1H21), which we believe was driven by volume recovery and good cost controls. Management shared that engine and component continued to recover in 2Q22, while OEM deliveries are close to pre-Covid-19 levels. Nacelle productions improved to 48 units/month in 1H22 (vs. 45 units/month at end-FY21); management reaffirmed its target of 53 units/month by end-FY22F.
TransCore commenced contribution; chip shortages still a concern
1H22 USS revenue rose to S$757m (+14% hoh, +43% yoy) on the back of: 1) new TransCore contribution, and 2) higher Smart City project deliveries. However, we note that core USS margins (excluding TransCore expenses) were weak at 1.2% (1H21: 3.0%) due to slow recovery in verticals impacted by Covid-19 and impact from chip shortages. Ramp-up in mitigation measures should help support margins; management remains cautiously optimistic of the segment’s outlook in 2H22F. We expect USS to record an FY22F EBIT loss of S$7m, we and lower our FY23-24F USS EBIT by 6-14%.
Defence remains a core pillar; reiterate Add at a lower TP of S$4.53
All defence sub-segments recorded yoy revenue growth, except for marine (-9% hoh, – 1% yoy), with the decline due to weaker shipbuilding demand. Huge order book and rising global tensions should continue to support the segment’s growth. We reiterate Add at a lower TP of S$4.53, based on blended valuations (Fig 6). Re-rating catalysts include strong defence order wins and quicker aerospace activity recovery. Downside risks include rising cost pressures eroding margins and border closures.