Initiate coverage with a Buy recommendation and TP of S$4.50.
Our TP is based on the discounted cash flow model. The operations generate strong cash flows. We expect it to deliver ROE and ROIC of 26.1% and 14.6% in FY24e.
As at end Jun 23, the orderbook stood at a record S$27.7bn. New order wins grew by 11.3% CAGR from FY19 to FY22 (Figure 1). Total orders won in 1H23 were S$9.5bn, comprising 54% defence and public security contracts, 32% commercial aerospace and 14% urban solution and Satcom (Figure 2).
ST Engineering is a global technology, defence and engineering group with a diverse portfolio of businesses across the aerospace, smart city, defence and public security segments. Though STE has built a reputation for strong research and development capability in advanced defence and mobility technologies, about two-thirds of revenue is derived from commercial projects (Figure 3).
Figure 3: 67% of revenue is derived from commercial jobs
Asia is its biggest market (Figure 4) and Singapore is an important market where it supports defence and public infrastructure projects. In Europe, it has a strong presence in Germany and Ireland due to its tie-up with Airbus for the passenger-to-freighter, or PTF conversion programme.
Revenue bounced back after the lull in FY20 when it faced delays in project execution and order deferment. Strong recovery in commercial aerospace, and the acquisition of TransCore in March 2022, which added revenue of S$620mn, more than offset the loss of revenue from US Marine which was divested in FY22.
STE has set a revenue target of S$11bn for FY26e (Figure 5), of which S$3bn will be derived from sustainability-linked projects. Revenue growth is projected at 2 to 3 times the global GDP growth rate.