ST Engineering Interims Reflect Solid Aerospace Recovery, but FVE Lowered on Higher Goodwill

ST Engineering's, or STE's, interim results were largely within our expectation with slightly stronger commercial aerospace, or CA, segment performance offset by weaker urban solutions and satcom, or USS, segment margins. The performance supports our thesis that CA recovery, driven by a rebound in international travel and robust demand for passenger to freighter conversions, will support profit in 2022 and over the next few years. The stronger CA contribution is helping to offset costs related to the acquisition of TransCore and the absence of any pandemic related government grants. The defense and public security segment is generally stable. We make marginal changes to our profit forecast, raising revenue to reflect stronger CA aerostructures growth but lowering USS margins. The net impact is a minimal 1.5% uptick to our 2022 net profit to SGD 580.8 million. However, we push back stronger margin recovery to 2024 from 2023 to reflect possible recession risks and lingering cost pressure. This leads to an 8.4% cut in our 2023 net profit to SGD 633.0 million, but a 4.8% hike in 2024 to SGD 790.0 million. There is little change to our projected 12.3% 2021-26 net profit CAGR.