A More Solid BUY With Palatable Valuation
We believe STE’s recent share price weakness was triggered by the core profitability miss of its 1H22 results. With STE now trading at 19.5x FY24 PE (based on our more conservative FY24 EPS estimate at 15% below consensus’) which is 1.0 SD below historical mean, we think further downside risks of earnings should have been largely priced in. The sustainable dividend yield of 4.3% should provide some support to STE’s valuation. Maintain BUY with a lower DCF-based target price of S$4.07.
WHAT’S NEW
• Share price weakness due to core profitability miss. Post its 1H22 results release on 12 Aug 22, STE’s share price has declined by a cumulative 7.5% (after the adjustment for an interim DPS of 4 S cents) in the past three weeks. We believe that the share price weakness was attributable to: a) the core net profit miss in its 1H22 financial results, and b) the weak sentiment in the general market (Straits Times Index dropped 2.5% during the same period). Based on our check with the company, there has been no major change in the company’s business operation and outlook.
STOCK IMPACT
• More palatable valuation with sustainable dividend yield of 4.3%. Following the share price decline, STE now trades at FY24 PE of 19.5x (1.0SD below historical mean of 21.3x) based on our updated FY24 EPS forecast of 19.1 S cents (our FY24 core EPS forecast is more conservative than peers at 15% below consensus’). STE’s annual dividend payment of 16 S cents is sustainable, translating to a yield of 4.3% based on STE’s current share price.
• Expecting better core performance in 2H22. STE remains on the recovery track this year and we expect its core net profit to improve meaningfully to S$274m (+36% hoh or +56% yoy) in 2H22, driven mainly by: a) a continued recovery/growth of its commercial aerospace (CA) segment, and b) potential higher project deliveries in the defence & public security (DPS) segment. The performance of urban solutions & satcom (USS) is also likely to improve as the mitigation measures adopted by STE to tackle the chip shortage issue (by securing alternative supply, product redesign, etc) gradually bear fruit. Overall, STE has guided to deliver S$4.6b worth of projects from its orderbook in 2H22; this is S$1b higher than its project delivery guidance of S$3.6b for 2H21 a year ago.
• Medium-term growth underpinned by record-high orderbook. STE’s record-high orderbook of S$22.2b at end-1H22 underpins STE’s revenue growth in the medium term. Despite some margin pressures from inflation, we expect STE’s core profitability to grow along with the revenue growth. We expect STE’s core net profit to return to pre-pandemic levels in 2023 (at S$552m) before reaching a new high in 2024 (at S$599m)
