ST Engineering: Powering ahead in growth
- 1H24 net profit largely in line despite weaker-than-anticipated satcom revenue and operating margins
- Interim dividend of 4.0Scts declared, on-par with the previous year
- Outlook remains promising; turnaround in satcom division likely to take longer
- Maintain BUY with a higher TP of SGD5.0 as we roll forward valuation peg
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- FY23 results slightly above expectations with TransCore turning earnings accretive ahead of guidance; raise TP to S$4.8001 Mar 2024
Overall business momentum continues to be strong, with 1H24 revenue surging 5.4% h/h and 13.5% y/y to SGD5.5bn, slightly beating expectations and led by growth in its CA and DPS segments. In the CA segment, both MRO and OEM sub-segments demonstrated remarkable growth, with revenue increasing by 32.3% and 19.9% y/y respectively, while the Digital Systems & Cyber and Marine sub-segments propelled growth in the DPS segment, growing by 15.6% and 18.8% y/y respectively, driven by contributions from D’Crypt and strong ship repair demand. Despite drag from the satcom business, overall urban solutions & satcom (USS) segment revenue grew 3% y/y, with the urban solutions sub-segment revenue rising by 8.6% y/y. This was led by TransCore, which saw double-digit growth y/y.
Group core operating profit margin shrank slightly to 8.8% in 1H24, down from 9.4% in 1H23. Notably, CA segmental margin fell to 7.1% in 1H24 from 8.3% in the same period last year, largely due to the absence of higher-margin aircraft sales (a gap of SGD94mn, low teens margin), a less favourable revenue mix, and project delivery timings. DPS segmental margin also dipped slightly but remained healthy at 13.2% in 1H24 (vs. 14.0% in 1H23). The USS division was the only segment to see margin improvement, with segmental core operating margin (excluding one-off restructuring costs and TransCore integration costs) climbing to 1.5% in 1H24 from 0.5% in 1H23.
We slightly raise our revenue estimates, but our net profit projections remain largely intact as we lower our margin assumptions. While we lift our FY24/25F revenue estimates by 1.8%/3.6% to reflect the strong momentum across STE’s segments, our net profit forecasts remain unchanged, imputing a 13% CAGR in core net profits between FY23-25F.
Commercial Aerospace: While Airbus’s negative revision to its delivery guidance for 2024 will negatively impact MRAS’s A320neo nacelle output, it's largely tempered by growth in other products, including the C919. Additionally, although STE’s passenger to freighter (P2F) conversion business could see softer-than-anticipated volumes owing to a lack of feedstock (airlines are prolonging the use of older passenger aircraft due to aircraft shortages), the group is confident about attaining margin improvement to mid-single-digits in FY24. On a more positive note, the MRO business continues to benefit from airlines’ increasing reliance on older aircraft with higher MRO content, and aircraft utilisation is still growing despite the constraints faced by airlines.
Urban Solutions & Satcom: Management maintained its guidance for the USS segment to perform better than the previous year and reiterated that the second half will be seasonally stronger.
Satcom subsegment performance has been lacklustre – remaining loss-making in 1H24 – and could continue to underperform given the challenges faced by the sector. iDirect has been adversely impacted by the disruptions faced by LEO constellations – LEO satellite networks have become increasingly congested and unstable, resulting in end-users seeking ground satcom equipment with multi-operability that can manage connections across satellites in any orbit. Furthermore, the group is also encountering stiffer competition from other vertically integrated providers. iDirect’s next-generation ground equipment system, Intuition, is on track to deliver multi-orbit, cloud-native capabilities that can provide seamless transition between terrestrial and satellite networks and end-to-end orchestration (automatically adjusting resources like bandwidth based on demand). However, we still see some execution risks on this front, and elect to assume a longer turnaround time for this subsegment.
Nonetheless, the core urban solutions business unit continues to perform well, with TransCore clinching multiple contract wins in the past few months, including a tolling system project with Delaware River Port Authority and ITS solution contract in St. Louis and Springfield. While the New York congestion pricing system has been placed on pause, there is limited impact on TransCore as it continues to receive O&M (operations and maintenance) revenue from the MTA, though we now believe that other cities may delay adopting congestion pricing in the near-term given its unpopularity amongst the masses during an election year.
Defence and Public Security: Defence revenue was up by 5% y/y in 1H24, not particularly noteworthy, but the margin profile continues to be impressive, and management is optimistic that this can be sustained. STE has been performing well in this area, securing SGD500mn of international contracts in 2024 YTD, including approximately SGD200mn of defence contracts, with solid momentum in international ammunition sales, not only for the 40mm but also for the 150mm. Furthermore, traction in its digital systems & cyber business unit continues to be sound and will be a key growth driver for this segment.
All-in cost of debt at 3.7% in FY24; likely to moderate in FY25 given large floating loan exposure. STE’s debt balance, primarily denominated in USD, was flat at SGD6.1bn, as net debt repayment in 1H24 was offset by depreciation in the SGD against the USD. The group has guided for its all-in finance costs to be 3.7% for FY24, assuming no Fed rate cuts for the remainder of the year. With the Fed turning more dovish, STE could potentially see a lower cost of debt in FY25, given that 39% of its total debt is on floating rates, though this will be partly mitigated by the refinancing of USD750mn (around 17% of total debt) of fixed-rate debt in April-25, which is currently on a low rate in the mid-2% range.
Maintain BUY with a higher TP of SGD5.0. While our net profit estimates are mostly unchanged, we raise our TP to SGD5.0 as we roll forward our valuation peg to a 20.0x blended FY24/25F EPS from the 21.0x FY24F EPS previously. We continue to like the stock, given its attractive valuation at sub-18.0x forward P/E – c.1SD below its five-year average – and solid growth trajectory backed by its robust orderbook.
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Related Stories
- Singapore Technologies Engineering: 1HFY24 results in-line with expectations amid satcom challenges14 Aug 2024
- ST Engineering: 1QFY24 revenue above expectations, as commercial aerospace and DPS strength offsets USS weakness13 May 2024
- FY23 results slightly above expectations with TransCore turning earnings accretive ahead of guidance; raise TP to S$4.8001 Mar 2024
Related Stories
- Singapore Technologies Engineering: 1HFY24 results in-line with expectations amid satcom challenges14 Aug 2024
- ST Engineering: 1QFY24 revenue above expectations, as commercial aerospace and DPS strength offsets USS weakness13 May 2024
- FY23 results slightly above expectations with TransCore turning earnings accretive ahead of guidance; raise TP to S$4.8001 Mar 2024