Despite write-downs, do not write-off
- 2H23 write-downs much larger than expected at S$1.7bn; operating recovery on track, vindicated by first interim net profit since 2018 in 2H23
- Fine-tuned our FY24-25F earnings by ~11%-12%, factoring in weaker margins for old contracts and product types
- Worst is behind; remain positive on STM’s turnaround though recovery path might be bumpy
- Reiterate BUY; TP adjusted to S$0.15 to reflect higher provisions and impairment in 2023
Bigger-than-expected write-downs in 2H23…STM reported a net loss of S$1.7bn for 2H23, bringing its full-year loss to S$1.94bn. This is much higher than the expectation of a S$500-600m net loss for FY23 due to massive non-cash write-downs of S$1.4bn for non-core assets and obsolete inventories arising from a strategic review; and S$0.6bn in provisions for onerous contracts, legal and corporate claims (largely the Brazil in-principle settlement), and merger-related expenses.
…but encouraging operating performance with interim profit for the first time since 2018. If we strip out the huge one-offs, core operations achieved a net profit of S$33m in 2H23 (partly aided by forex gains, which is considered part and parcel of the O&M business), marking the first time it has achieved an interim profit since 2018, from a small loss in 1H23.
Any further provision and impairment risks? Management believes that sufficient provisions and impairments have been made after a thorough assessment of combined assets in the merged entity. Goodwill resulting from the merger is also justifiable and no impairment is required at this point.
Slowly but surely; bottoming out from here. 2023 is a transition year for STM. Tremendous improvement in operations has been achieved this year, delivering over 50% y-o-y growth from FY22 combined revenue and strong positive EBITDA of S$628m. A more prominent earnings turnaround could be expected from 2024 onwards, with integration synergies and improved productivity. Meanwhile, the robust order pipeline and upcoming Investor Day for sharing the Strategic Review on 15 Mar are near-term catalysts and confidence boosters.
