Laying down the tracks
- STE clinched a S$1.4bn rail contract for the Kaohsiung Yellow MRT Line, the largest rail contract in STE’s operating history. Order book rose to S$23.6bn.
- Market could be penalising STE (-8% MTD) for the below-expectations 1H22 core profit, rising interest rates concerns, and Oshkosh bid loss, in our view.
- STE trades at 17x FY23F P/E, below its 7-year average of 21x, and 4.2% yield. Catalysts: defence contracts from Middle East and margin recovery.
S$1.4bn rail contract secured for Kaohsiung Yellow MRT Line
STE’s stake in the New Kaohsiung Yellow MRT Line contract amounts to S$1.4bn. This is part of the c.S$8.8bn contract awarded to the consortium with Siemens Mobility and Stadler Rail which are responsible for the provision of signalling systems and rolling stock. STE is the main project manager for this contract, which includes above-ground train depot design, construction, equipment fit out, provision of communication systems, automatic fare collection system, platform screen doors, and traction electrification system. The project will start by late-2022 and be executed over a period of 10 years.
Order book at a new high of S$23.6bn
The contract is the largest-ever rail project win for STE. Several notable rail contracts won in recent years include the Kaohsiung MRT Red Line Extension (S$445m) and North-South and East-West Lines in Singapore (S$180m). With the new contract win, STE’s order book rises to a new high of S$23.6bn. We see potential for further smart mobility wins, given 1) the large contract size could increase global awareness of STE’s smart mobility solutions, and 2) it could see cross-selling opportunities via TransCore.
Our thoughts on recent share price weakness in Aug
STE’s share price fell 8% in Aug and we think this could be due to 1) below-expectations 1H22 core profit (S$208m), 2) concerns over rising rates, and 3) STE-Oshkosh’s bid loss to BAE Systems for the cold weather all-terrain vehicle contract with the US Army.
1) Market may have underappreciated STE’s efforts to optimise costs to close the gap from loss of Covid-19 related grant and tackle inflation pressures. Note that the pension restructuring (resulting in a S$72m gain) is not mandatory but on a voluntary basis by STE. We believe STE’s aggressive efforts to optimise costs continue to ensure margin improvement while chasing for topline growth.
2) STE’s effective interest cost was 2% as of 1H22. About 55% of its total debt is on fixed interest rates which should help mitigate some impact from imminent rate hikes. We factor in an effective interest rate of 2.1% for FY22F, and 1.9% for FY23-24F assuming debt repayment and strong cash from TransCore.
3) Despite the bid loss for US Army contract, STE’s recent agreement with Saudi Arabia Military Industries spells hope for more potential defence contract wins. We reiterate Add with an unchanged TP of S$4.53, based on blended valuations (Fig. 4). Downside risks include rising cost pressures and slower aerospace recovery.