• Still BUY, new SGD5.20 TP (from SGD5.32), 17% upside, c.4% yield. ST Engineering's 4Q24 order delivery guidance of SGD2.6bn equalled our revenue estimate for the quarter. We raise 2024 topline by 3% to account for revenue from within-quarter business. 2025-2026 revenue is raised (by 2% each) amidst a stronger outlook for Defence & Public Security (DFS) and Commercial Aerospace (CA). We lower 2024-2035 profit by 5% and 3% amidst slower improvements in Urban Solutions & Satcom (USS) margins. Nevertheless, we still expect STE to deliver 15% profit CAGR in 2023-2026.

• Key changes to estimates. For the CA segment, although STE has maintained its mid-single-digit EBIT margin by the end of 2024 and SGD700m revenue guidance by 2026 for the passenger-to-freighter (PTF) business, the reduced PTF volume in the near term – amidst lower availability of feedstock – could slow the ramp-up in margin improvement. The more significant changes to our 2024 profit estimates are from reducing the margin for the USS segment, which remains soft amidst slower-than-expected improvements in the Satcom business. While we remain positive on STE being able to register margin improvement for the USS segment, we are now a bit more cautious about the rate of this improvement in 2025.

• Still upbeat on the outlook. STE has delivered 15% returns YTD. While the share price performance has been a bit soft post announcement of its 3Q24 business update, we remain upbeat on its earnings improvement trajectory. Profit growth will continue to be supported by the CA and DPS segments, with expectations of a more gradual margin recovery for the USS segment. The CA segment will be aided by continued strong demand for aviation MRO work. This is evident from STE’s hangars operating at 90% utilisation levels and it repurposing some of its PTF capacity to meet the increased MRO demands. STE’s hangar capacity will be increased by 20% in 2024 and 30% in 2026 as compared to pre-COVID-19 levels. The sustained delivery of defence contracts should support growth for the DPS segment. The moderation in order win momentum reported in 3Q24 was in line with expectations. STE's order backlog of SGD26.9bn continues to provide c.2.5 years of revenue visibility. We have now incorporated a 30bps decline in interest costs for 2025.

• Valuation basis and ESG premium. Our TP is derived by using an average of forward P/E, P/BV, EV/EBITDA, and DCF of adjusted free cash flows. It also includes a 4% ESG premium over the SGD5 fair value, given STE’s 3.3 ESG score vs the 3.1 country median.

Source: RHB Securities Research - 28 Nov 2024