Hello Tigers! Firstly so sorry, Sir Bahamut was busy with his home renovation and at work, did not have time to write any articles.
Quick mid-year review and 2H23 outlook
I wanted to do a quick mid-year review on my portfolio as I have outlined my 2023 strategies in December 2022 here: https://ttm.financial/post/9923820740
My decision to overweight in semiconductors and Cybersecurity in my portfolio turned out to be quite profitable! I still remembered I recommended some of my good friends such as @LMSunshine to buy AMD Nvidia and ASML towards the close of 2022. In contrast, the performance of China Tech remained lacklustre due to the slower-than-anticipated economic recovery in China. YTD, my portfolio performance has been very satisfactory :)
At present, my investment portfolio holds a higher proportion of US Tech stocks, US semiconductor companies, SG banks, and SG REITs. However, I've noticed that SG REITs are becoming more precarious, as many of them are likely to undergo significantly dilutive Equity Fund Raising to reduce leverage. Additionally, the growing cost of interest is outweighing the gains in Net Property Income. Looking ahead, I'm planning to rebalance my portfolio by shifting some of my investment from SG REITs to Chinese/Hong Kong-based stocks that offer strong dividend yields, a robust domestic market, and resilient demand even amidst macro uncertainties.
ST Engineering’s strong 2H23 outlook
I have been paying attention to ST Engineering (STE) lately as I anticipate a significant increase in defence expenditures due to the escalating global geopolitical tensions. STE’s 1H23 was okay. PATMI met expectations, but stronger than expected order wins so far this year and the start of the US$500 million Manhattan congestion project in 2H23 suggest that profitability could recover soon. Optimism is also supported by the continued recovery in the commercial aerospace (CA) segment, where STE management is targeting a high single-digit EBIT margin for passenger-to-freighter (PTF) conversions by 2025 (compared to EBIT breakeven in 2H23).
1H23 revenue exceeded market consensus, reaching S$4.9 billion, marking a 14% y-o-y increase. The strong growth was driven by the strong performance of the CA unit (+32% y-o-y) and Urban Solution and Satellite (USS) (+18% y-o-y). On the other hand, the Defense and Public Security segment remained flat y-o-y, as it was still adversely affected by semiconductor supply constraints. Despite the robust revenue growth, PATMI stood at S$281 million, maintaining the same level as the previous year, mainly attributed to an upsurge in interest expenses (1H23: $127 million compared to 1H22: S$42 million), which offset the gains in revenue.
Commercial Aerospace see meaningful growth!
CA division achieved an impressive 32% y-o-y revenue growth, driven by amplified nacelle production volumes and increased utilization levels, which coincided with a notable upsurge in demand for Maintenance, Repair, and Overhaul (MRO) services. In response to the rebound in international air travel, STE is expanding its hangar capacity. If we exclude the S$72 million gain from pension restructuring observed in the first half of 2022, the EBIT would have shown a 60% y-o-y growth!
Furthermore, the losses from PTF conversions are anticipated to decrease further, with management estimating that EBIT could achieve a breakeven point in the second half of 2023. Looking ahead, there are expectations for the EBIT margin to reach a high single-digit figure by the year 2025, which would contribute significantly to the overall profitability of the group.
US-based Transcore to turn earnings accretive by 2H23!
Despite achieving an 18% year-on-year revenue growth, reaching $0.9 billion, the USS unit experienced an increase in losses, resulting in EBIT of -S$34 million (compared to -S$12 million in the first half of 2022), as performance was affected by factors such as semiconductor shortages, costs associated with restructuring (including a 20% reduction in Satcom headcount), and a divestment loss of S$24 million linked to SatisFy shares.
Nonetheless, STE management remains optimistic about the prospects for recovery in the second half of 2023. The initiation of Transcore's US$500 million Manhattan electronic toll solutions project recognition is expected to contribute to an improvement in earnings. With further milestone completions, Transcore’s EPS accretion target from the second year onwards remains intact.
Conclusion
STE successfully secured order-book wins totalling S$9.5 billion in 1H23, marking a substantial increase from the S$5.5 billion achieved in the same period of 2022. These impressive order wins contribute significantly to the visibility of the group's earnings outlook.
Moreover, STE’s resilience during uncertain times, evident through its impressive history of dividend distribution and substantial involvement in defense-related projects, set to experience consistent growth in the upcoming years. Looking forward, STE’s growth is likely to be driven by structural growth catalysts, such as its engagement in smart city initiatives and the progressive advancement of PTF conversion business. Both of these factors are likely to contribute noticeably to profit augmentation. Also, the revival of the commercial aerospace sector following global reopening adds to its positive outlook. ST Engineering's strong financial foundation and favourable operational cash flow profile is also a bonus to investors as they positions STE for both short-term recovery and long-term revenue and earnings expansion.
Comments
It is important to note that the defense industry is cyclical, and ST Engineering will need to manage its risks in order to maintain its profitability in the long term.
The company is well-positioned to benefit from the growing demand for defense products and services, and it is also expanding into new markets.
The strong performance is a sign that investors are bullish on ST Engineering's future prospects.
ST Engineering's mid-year portfolio performance has been strong.