Excerpts from UOBKayHian report

Singapore Technologies Engineering (SGX: S63)

• Singapore Technologies Engineering (STE) 1Q24 revenue of S$2.70b is in line, accounting for 24.6% of our full-year projection.
• Group revenue rose 18% yoy, driven by strong revenue growth in CA (+32%, backed by strong demand) and DPS (+14%). USS posted yoy marginally lower revenue due to project timing.
• A strong orderbook of S$27.7b as of end-1Q24 provides good revenue visibility in the medium term.

Maintain BUY on STE for its strong organic core earnings growth (2024-26 CAGR: 10.2%). Target price: S$4.50

1Q24 business update; revenue in line

STE 1Q24 revenue of S$2.70b (+18% yoy) is in line with our expectations at 24.6% of our full year forecast.

• Commercial aerospace (CA): 1Q24 CA revenue of S$1.15b (+32% yoy) came in slightly stronger than our expectations, at 27.4% of our full-year forecast. The CA revenue growth was driven by broad-based revenue growth across different sub-segments. According to management, the CA division is firing on all cylinders (MRO, P2F, Nacelle manufacturing) and its capacity is close to being optimally utilised.
• Defence & public security (DPS): 1Q24 DPS revenue of S$1.12b (+14% yoy) is in line with our expectations, at 24.2% of our full-year forecast. The DPS revenue growth was also driven by growth in all sub-segments.
• Urban solutions & satcom (USS): 1Q24 USS revenue of S$429m (-1%) is slightly behind our projections, at 20.0% of our full-year forecast. STE noted that TransCore has registered over 10% yoy growth in 1Q24, but the Urban Solutions base business revenue will be more 2H weighted. Satcom business remains under transformation, which has been progressing well, according to management.

Orderbook standing at a record high

STE’s orderbook stood at S$27.7b at end-1Q24 (4Q23: S$27.4b), matching the previous record-high levels at end-2Q23.

During the quarter, STE secured S$3.0b worth of new contracts, contributed by healthy contract wins across all three segments (CA: S$0.84b, DPS: S$1.65b, USS: S$0.54b).

STE guided for S$6.5b worth of contracts to be delivered in the rest of 2024; this is 12% higher than S$5.8b contract delivery guidance a year ago for Apr-Dec 23.

On track to hit record levels of revenue and net profit in 2024

With the strong orderbook and STE’s guided yoy higher orderbook conversion to revenue, we maintain our expectations that STE will achieve record-high levels of annual revenue at S$11b in 2024 (+8.9% yoy).

This means that STE will hit its 2026 revenue target (communicated in its 2021 corporate strategy) two years in advance. We forecast STE’s core net profit to grow 15.6% yoy to S$641m in 2024.

The faster growth in core net profit than revenue is explained by our projected slightly better overall operating margins for the group in 2024 at 8.5% (2023: 8.4%), backed by largely stable/improving operating margins of individual business segments.

Valuation/Recommendation

Maintain BUY and target price of S$4.50. Our target price is based on 7.75% WACC and 2.5% terminal growth assumptions. STE currently trades at 18.1x 2025F PE, 1.7SD below its historical one-year forward mean PE of 21.7x.

Our target price implies a 20.2x 2025F PE, 0.7SD below the historical one-year forward mean.

You can find the full report here and the company website here.