Defensive giant in trying times
Strong balance sheet to combat rate hikes
We evaluated the impact of aggressive rate hikes to STE’s float rate borrowings would be minimal as we lower our earnings forecast by just 2- 3% considering STE’s revenue outlook remains positive as the aviation industry continues to recover and strong balance sheet reserve of USD32m will reduce yield for future bond issuance. Under our enhanced ESG review, STE scores an above-average 58 points, which we think could be improved with more transparency.
Trimming earnings forecasts to factor in higher rates
As the cost of debt is rising, funding the acquisition of TransCore remains a key concern among investors. Noted that bulk of STE’s floating-rate debt is short-term commercial paper (CP) with SGD2.8b outstanding. We believe CP will face pressure from rising interest rates as the short duration exposes it to rollover risk upon maturity. As such, we revise up our FY22-24E interest expense forecast by 15-25% and lower our net profit forecasts by 2-3%. As at Apr’22, STE still holds USD32m in reserves on its balance sheet. We think STE will refinance a portion of its CP in FY23E by issuing longer-duration bonds with a lower yield.
More disclosures would improve ESG performance
STE has an established an ESG framework and internal policies, but could further improve its quantitative “E” metrics. The company’s targets include reducing carbon emissions by 50% by 2030 (against 2010 baseline). We think a higher degree of transparency with a more comprehensive plan towards Scope 3 emission and waste reduction would enhance its overall ratings. ESG scores could also be higher with further disclosure on waste and water consumption.
Amid rising interest rates, we lower our DCF-based TP to SGD4.20 from SGD4.50, as we raise our risk-free rate and cost of debt numbers. However, we believe STE’s strong order book (+22% YTD) and FY23-24E EPS growth of 10-12%, may be key catalysts in this recessionary environment. STE is trading at c.16.68x FY23E PER (below its 5-year mean) with 23% upside potential. Maintain BUY.