Date of Report: October 14, 2024
Broker: CGS International

Middle East Expansion: S$60m Smart City Contract in Qatar

ST Engineering (STE) has secured a notable S$60 million contract with Lusail Real Estate Development Company, a subsidiary of Qatari Diar. This contract involves the design, build, and operation of a smart city platform for Lusail City, Qatar. The project, scheduled to commence in 4Q24F and conclude by 2027F, will utilize STE’s AGIL Smart City Operating System, powered by AI, machine learning, and data analytics, to manage various smart city solutions like lighting, building, and traffic management.

While the contract value is relatively small compared to group revenue, the report views it positively, as successful execution could lead to larger contracts in the Middle East. STE has already achieved wins in the region, including a smart carpark contract in Dubai and multiple international defense contracts.

3Q24F Revenue Expectations

STE is expected to report a double-digit topline growth for 3Q24F, with revenue estimated to come in between S$2.75 billion to S$2.79 billion (+13-15% YoY). Commercial Aerospace and Defense segments are expected to be the primary revenue drivers, both contributing approximately 15% YoY growth.

Future Growth Catalysts

STE’s ongoing efforts to secure large tolling contracts in Asia could serve as key re-rating catalysts. Its tolling subsidiary, TransCore, which represents about 10% of FY24F revenue, could see a longer-term growth runway with major contract wins.

The report highlights potential re-rating catalysts for STE, including significant defense and tolling contract wins in Asia. However, downside risks include a potential economic slowdown that could affect order wins and Aerospace activities.

Stock Performance and Valuation

As of October 14, 2024, STE’s stock price stood at S$4.67, with a target price of S$5.30, representing a 13.5% upside. The company maintains an “Add” rating, driven by a positive outlook on both the Aerospace and Defense sectors, supported by a forecasted 15% core EPS compound annual growth rate (CAGR) from FY24F to FY27F. The stock is trading at a forward P/E of 20x CY25F earnings, which aligns with its 10-year average.

STE’s revenue growth for FY24F is forecasted at 12.4%, with operating EBITDA margin expected to remain steady at around 13.4%. Commercial Aerospace and Defense are projected to remain key contributors, with significant growth expected over the next few years.

Key Financial Metrics

For FY24-26F, STE is expected to deliver robust financial results:

• FY24F Revenue: S$11.35 billion
• FY25F Revenue: S$12.12 billion
• FY26F Revenue: S$12.71 billion
• FY24F Net Profit: S$703 million
• FY25F Net Profit: S$805 million
• FY26F Net Profit: S$873 million

Key growth metrics include a recurring ROE of 27.4% for FY24F, increasing to 28.6% by FY25F, and a consistent dividend yield of 3.43%.

Major Shareholders

STE’s major shareholders include:

• Temasek Holdings: 50.0%
• Capital Group: 5.0%
• BlackRock: 1.8%

Conclusion

STE continues to strengthen its position in the Middle East, leveraging its expertise in smart city solutions. With promising growth prospects, particularly in Aerospace and Defense, and potential contract wins in tolling, the company remains well-positioned for future growth.