Analysts have maintained their positive views on Singapore Technologies Engineering&rsquo s (ST Engineering) S63 -0.26% , given improving results across its various key businesses, and how its order book, at a record of $27.7 billion, will give plenty of earnings visibility ahead.

 

On Aug 11, the group announced that earnings for its 1HFY2023 was $280.6 million, up 0.2% y-o-y. Earnings per share (EPS) was up similarly by 0.2% y-o-y to 9.01 cents.

 

Revenue in the same six month ended June was up 13.9% y-o-y to $4.86 billion, with higher contributions across its three business segments.

 

Meanwhile, gross profit saw a significant rise of 15.5% y-o-y to $980.4 million, whilst group ebitda rose 16% y-o-y to $711 million.

 

Following the healthy set of results, Citi Research has upgraded its call to &ldquo neutral&rdquo from &ldquo sell" previously, whilst DBS Group Research, Maybank Securities, UOB Kay Hian, RHB Bank and CGS-CIMB Research have all kept their &ldquo buy&rdquo and " add" calls.

 

Citi, Maybank, UOB, RHB and CGS-CIMB have also raised their target prices, whilst DBS has kept its target price of $4.20 unchanged.

 

Citi has raised its target price to $3.76 from $3.33, Maybank to $4.20 from $4.10 previously, UOB to $4.20 from $4.00 previously, RHB to $4.50 from $4.25 previously, and lastly CGS-CIMB to $4.27 from $4.00 previously.

 

Citi analyst Jame Osman says he is &ldquo encouraged&rdquo by ST Engineering&rsquo s efforts to manage costs incurred from running underperforming assets, capital recycling to reduce its gearing levels while driving operational leverage as well as margin improvement in the core businesses such as the defence and public security (DPS) segment, which is seen to benefit from the momentum of new order wins.

 

Osman is also cheered by the improving commercial aerospace (CA) segment, which is riding on the recovery in air travel. For one, ST Engineering says it is on track to turn ebit positive on its passenger to freighter (PTF) business this year, while its engine/component MRO demand is showing signs of improvement.

 

Osman notes that while there are near-term worries such as labour shortages and supply chain bottlenecks, topline momentum &ldquo appears to finally have driven&rdquo underlying operational leverage.

 

ST Engineering has also continued to invest in significant hangar capacity in the US and China so that it can capture potential growth ahead. However, in doing so, it could result in some front-loading of expenses.

 

As for ST Engineering&rsquo s urban solutions and satcom sector (USS) business segment, the group highlighted that its 20% reduction in headcount of its satcom business portfolio should reduce costs by $30 million to $60 million over the next five years, although it also flagged that continued research and development (R& D) investments will be required to future-proof the business.

 

Ebit levels for the USS are comparable to FY2022, as its performance will be weighted to 2HFY2023 from projects including TransCore and its Kaohsiung rail contracts.

 

The group expects TransCore, which was acquired at a cost of US$2.7 billion in early 2022, to turn earnings accretive in its second year, along with more project deliveries.

 

&ldquo We think ST Engineering&rsquo s stronger topline momentum is finally beginning to drive better operational leverage in its core businesses,&rdquo says Osman.

 

&ldquo However, we remain cautious on the near-term risk factors [which are] cost inflation and inflation,&rdquo opines the analyst, who has raised his EPS estimates by 11%, 10% and 5% for the FY2023 to FY2025 mainly on expectations for ST Engineering&rsquo s margins to grow in a more sustainable manner.

 

Meanwhile, Maybank Securities analyst Kelvin Tan believes that ST Engineering, with earnings seen to grow at a CAGR of 14% between FY2022 to FY2024, &ldquo remains a good investment&rdquo , given its undemanding valuation now.

 

Supportive factors includes the recovery of the CA segment, which is seen to deliver 14% ebit CAGR. Next, contribution from TransCore, plus annual cash savings from streamlining and restructuring in USS, will help lift this segment&rsquo s ebit by a 64% CAGR. In addition, the DPS segment will benefit from rising defence spending in Singapore, says Tan, who expects this division to enjoy 7% CAGR for FY2023 to FY2025.

 

Tan believes upside catalysts might come from higher-than-expected PTF work from airlines upgrading their passenger fleets with supported cargo growth, and better-than-expected margins if aircraft original equipment manufacturers (OEM) slow down their aftermarket expansion due to full order books.

 

Further upside can be expected if ST Engineering wins more orders from US defence and infrastructure projects, an area that ST Engineering has been pursuing but where large contracts have been few.

 

On the other hand, downside risks include the ongoing rise in inflation which could make aircraft materials and equipment more expensive, as well as growing competition from aircraft makers themselves namely Boeing and Airbus in the aftermarket-MRO space.

 

UOB analyst Roy Chen notes that last year&rsquo s 1HFY2022 profit was significantly helped by one-offs, whereas the 1HFY2023 result was driven by core performance.

 

The analyst also points out that ST Engineering&rsquo s guided orderbook of $4.4 billion expected to be delivered in 2HFY2023 is &ldquo slightly lower&rdquo compared with the $4.6 billion guidance &ldquo given a year ago&rdquo for 2HFY22.

 

Chen includes negative margin surprises due to project cost overrun and inflationary cost pressure as key risks.

 

RHB analyst Shekhar Jaiswal is concerned with financing costs to be incurred by ST Engineering. He notes that ST Engineering issued a US$500 million ($677 million) three-year fixed-rate bond in May at a yield of 3.3%.

 

&ldquo It is guiding for a FY2023 borrowing cost of low 3% and a FY2024 borrowing cost of mid-3%. While ST Engineering expects the total borrowings to drop to mid-$5 billion in December from $6.2 billion in June, based on our forecasts, we found it difficult to build it in,&rdquo says Jaiswal, who nonetheless, expects debt to to gradually decline in FY2023 to FY2025.

 

Meanwhile, key drivers cited by the analyst include strong order wins and contributions from acquisitions, whilst key risks include a lower revival in the CA sector, lower than expected contribution from acquisitions and lastly a delay in the implementation of Singapore&rsquo s smart nation initiative.

 

For CGS-CIMB analyst Lim Siew Khee, there was a bright spot in the 1HFY2023 results in the form of $300 million in ebit booked by the DPS segment.

 

She also noted how the USS segment continues to harvest from the acquisition of Transcore, as its 1HFY2023 revenue rose 27% y-o-y to $741 million.

 

&ldquo The execution of the US $500 million ($677 million) New York Congestion Pricing project in 2HFY2023, streamlining of Satcoms, as well as easing of supply chain pressures should result in a significantly stronger 2HFY2023 for the USS segment,&rdquo says Lim.

 

Lastly, DBS analysts Survo Sarkar and Jason Sum like STE for its long-term prospects.

 

&ldquo The big story is that instead of revenue stagnation seen historically, growth momentum will continue even beyond that, built on the solid foundation established over the last few years, driving robust mid-single digit organic growth across segments even out to FY2026,&rdquo the analysts note.

 

Sarkar and Sum include the group&rsquo s exposure to global slowdown as a key downside risk: &ldquo Deeper than expected recession scenario in the developed economies of the west could dent earnings outlook, as STE derives a significant amount of revenue from the US at 23% and Europe at 20%.

 

ST ENGINEERING : S63 +1.07% reported a net profit of S$280.6 million for the first half ended Jun 30, a marginal 0.2 per cent increase from S$280 million in the corresponding year-ago period. This was in spite of a 13.9 per cent increase in revenue, to S$4.9 billion.

 

The company&rsquo s earnings were hit by a 177.4 per cent increase in net finance costs, to S$92.8 million. Although finance income grew 300.8 per cent, to S$34.4 million, this was insufficient to offset the 202.4 per cent increase in net income, to S$127.2 million.

 

ST Engineering is nevertheless optimistic of a better performance in the second half of the year, especially in its Urban Solutions and Satcom arm, which is due to enjoy cash savings of up to S$60 million over the next five years.

 

Commercial Aerospace was the best performing segment in the first half of the year, as earnings before interest and taxes (Ebit) rose 60 per cent to S$178 million, from S$111 million (excluding a pension restructuring gain in H1 2022).

 

Including the one-off gain, however, Ebit would have fallen 3 per cent. Revenue grew 32 per cent to reach S$1.9 billion from S$1.4 billion.

 

The company said it remained confident on growth in the sector, as travel recovers to pre-Covid level, into a &ldquo growth phase&rdquo .

 

ST Engineering chief executive Vincent Chong reiterated expectations that the group&rsquo s commercial aerospace would recover its pre-Covid level by 2024, on the back of sustained efforts investing in expanding hangar capacity even in the trough of the pandemic.

 

Meanwhile, its Defence and Public Security arm recorded an Ebit improvement of 41 per cent, from S$214 million last year to S$301 million in H1 2023, due largely to business growth, cost savings, a diverse margin mix and an absence of losses from US Marine. Inclusive of the divestment loss of US Marine, revenue was up 4 per cent, to S$2.1 billion.

 

The group said the improvement came largely on the back of project deliveries, which are expected to continue through the year. ST Engineering also booked a new order win of S$5.2 billion in the first half of this year.

 

Its Urban Solutions and Satcom division fared the worst its losses swelled from S$12 million in H1 2022 to S$34 million in H1 2023.

 

Satcom&rsquo s business worsened in the first half of this year due to supply-chain disruptions &ndash specifically in chip shortages the impact of Covid-19 and a one-off loss of S$24 million on the divestment of SatixFy shares also weighed on the segment&rsquo s bottomline.

 

However, the company said that, excluding Satcom&rsquo s weakness and the one-off divestment loss, Ebit for the segment would have been S$30 million higher.

 

ST Engineering&rsquo s earnings per share rose 0.2 per cent to S$0.0901 from S$0.0899. 

 

The directors have approved a second interim dividend of S$0.04 per ordinary share for the quarter ended Jun 30, to be paid out on Sep 1, after book closure on Aug 23. This would take dividends for H1 2023 to S$0.08 per share.

 

Following a round of &ldquo right-sizing&rdquo , which entailed lowering the headcount in Satcom by 20 per cent, Chong said the company would now enjoy up to S$60 million in cash savings annually, as staff cost savings are ammortised over the next few years.

 

The company is also focusing its efforts on building a multi-orbit platform for all its Satcom customers, converging its other platforms into one.

 

Chief financial officer Cedric Foo said that the merging of the platforms would also lead to reduced engineering hours.

 

It also expects Transcore &ndash a US transportation company acquired in 2022 &ndash to be earnings accretive in 2024, on the back of project deliveries weighted in the second half of this year.

 

&ldquo We expect 2024 to be stronger than 2023 for Satcom, with the absence of the one-time cost from the divestment of SatixFy shares as well as the strengthening of our base business,&rdquo said Chong. He added that the group will provide an outlook on the segment when the full-year&rsquo s results are in.

 

He is also setting a target of tripling the company&rsquo s digital business revenue to more than S$500 million by 2026. He added that the company was &ldquo making good progress&rdquo , and that he expects it to outperform the target.

 

RHB Bank Singapore analyst Shekhar Jaiswal is maintaining his &ldquo buy&rdquo call on Singapore Technologies Engineering (ST Engineering) S63 0.27% as he expects the stock&rsquo s strong share price performance to continue.

 

The analyst has also raised his target price on ST Engineering to $4.25 from $4.05 previously, noting that the stock&rsquo s share price has risen 10% year-to-date (ytd) and outperformed the benchmark Straits Times Index (STI) by 7%.

 

Jaiswal&rsquo s new target price represents an upside of 15% to ST Engineering&rsquo s share price of $3.70 as at its close on Aug 2. The new target price, which includes a 6% environmental, social and governance (ESG) premium over the fair value of $4, also represents a yield of 4%.

 

&ldquo We continue to believe that ST Engineering is positioned to benefit from the revival in global air travel and increased government spending on infrastructure and defence,&rdquo he writes.

 

In his report dated Aug 3, the analyst continues to view ST Engineering as a &ldquo special investment opportunity&rdquo with strong earnings growth potential and a well-supported defensive yield.

 

He believes the group&rsquo s FY2023 to FY2025 earnings will be supported by a recovery in global aviation traffic boosting its commercial aerospace (CA) segment, contributions from its TransCore acquisition supporting strong growth for its urban solutions and satcom (USS) segment starting FY2024 and lastly, rising defence spending supporting growth for its defence public security (DPS) segment.

 

Jaiswal expects the CA segment to deliver 14% ebit CAGR, the USS segment to deliver 64% ebit CAGR, and the DPS segment to deliver 7% ebit CAGR.

 

&ldquo ST Engineering&rsquo s outstanding orderbook stands at an all-time high of $25.4 billion, providing over two years of revenue visibility,&rdquo he notes.

 

ST Engineering will be announcing its results for the 1HFY2023 ended June 30 before the market opens on Aug 11.

 

&ldquo We continue to expect [that] in FY2023 ST Engineering will deliver about 6% growth in revenue to $9.53 billion and around 14% growth in profit to $549 million. In line with management expectations, we believe that project deliveries will be weighted in 2HFY2023, implying that upcoming 1HFY2023 reported numbers could account for less than 50% of our full-year estimates,&rdquo says Jaiswal.

 

He continues: &ldquo ST Engineering should deliver a 17% profit compound annual growth rate (CAGR) during FY2022 to FY2025 and continue to pay 16 cents of dividends each year thanks to its strong free cash flow (FCF) generation despite elevated debt levels. We make small adjustments of around 1% to our earnings estimates and roll forward our valuation basis to 12-month forward estimates.&rdquo