ST Engineering - CGS-CIMB Research 2023-03-16: Margins At Inflection Point

• We believe all three ST Engineering (SGX:S63)'s business segments are on track for margin recovery in FY23F.
  • Urban Solutions & Satcom (USS) will see a full-year consolidation from Transcore and tapering integration & transaction costs.
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  • Defence and Public Security (DPS) whose margins were hit by higher energy costs in 2H22, should see some reprieve in addition to the absence of ~US$60m (S$80m) in annual losses with its exit from the US Marine business.
• All in, we forecast ST Engineering’s EBIT margin to hit 9.4%, similar to its 2019 pre-COVID level of 9.3%.

Why did ST Engineeting’s share price underperform?

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• total debt rising to S$6.2bn in 1H22 and related finance costs; and
• earnings accretion from Transcore acquisition yet to be seen (to come in 2H23F).
• With ST Engineering’s profile likely transforming from dividend yield to durable growth, and its impending margins recovery, we think FY23F could be an inflection point.

Defence still an angle

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Above is the excerpt from research report by CGS-CIMB.
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