Set for a stronger FY24F
- STE guided for weaker yoy FY23F USS EBIT. We expect margin rebound in FY24F on ramp-up of major projects and streamlined Satcom costs.
- We think FY24-25F Aerospace EBIT margins could sustain at 9-10%, on stronger operating leverage and improving PTF profitability.
- Order book remained elevated at S$27.5bn as of 3Q23. Reiterate Add, with an unchanged TP of S$4.27, based on blended valuation (Fig 2).
Decent revenue growth led by aerospace, while order wins tapered
ST Engineering’s (STE) 3Q23 revenue of S$2.4bn (-5% qoq, +9% yoy) was in line, with 9M23 revenue forming 75% of both our and Bloomberg consensus’ FY23F forecasts. Commercial Aerospace (CA) revenue was the key driver (+27% yoy), while Urban Solutions & Satcom (USS) recorded slight yoy growth (+6% yoy). 3Q23 order wins tapered to S$2.2bn (-53% qoq, -54% yoy), with all three segments seeing yoy declines.
USS: margins likely to rebound in FY24F; Satcom review ongoing
STE guided for FY23F USS EBIT to be positive but lower yoy, largely due to lower-than-expected Satcom revenue from delayed customer spending and ongoing transformation challenges. We are not too concerned of the lowered guidance as we had already baked in weak USS EBIT contribution in FY23F. Regarding the ongoing lawsuits against New York City’s congestion pricing plan, we do not foresee any material delays impacting subsidiary TransCore’s portion of the project (US$500m) as TransCore will continue to recognise revenue based on project milestones set forth by the Metropolitan Transportation Authority (MTA). We expect USS to see a strong margin rebound in FY24F, on: 1) a ramp-up of major projects (e.g. Taiwan rail mobility projects, US tolling contracts), and 2) optimised costs following Satcom transformation.
Positive Aerospace trends; PTF on track to EBIT breakeven
Maintenance, repair, and overhaul (MRO) revenue grew yoy (amount undisclosed) in 3Q23, driven by both airframe and engine & component (E&C). Hangar utilisation is close to maxed out, while E&C shops’ utilisation saw qoq improvement to 85%. STE continued to ramp up nacelle production rates in 3Q23, while passenger-to-freighter (PTF) conversion is on track to achieving EBIT breakeven by end-FY23F, according to STE. Expansion plans are on track, with: 1) Guangzhou hangar commencing in 1Q24F, and 2) Ezhou, Singapore, and Pensacola hangars commencing in 2025F.
Reiterate Add, with an unchanged TP of S$4.27
STE expects to recognise more aircraft sales in 4Q23F (none recognised in 3Q23) and reduce its debt further; FY24F weighted average interest cost was guided at mid-3% (assuming 1 more rate hike). Reiterate Add on strong earnings growth over FY23-25F. Our TP is unchanged at S$4.27, based on blended valuation. Key catalyst: stronger-than-expected USS margins. Key downside risks: project cost overruns, global economic slowdown impacting order wins.