Singapore Technologies Engineering Ltd

SGX:S63

Earnings Call Analysis

ST Engineering H1 2023: Steady Profit, Robust Growth

ST Engineering's first half of 2023 reflected a promising year-on-year growth, with total group revenue climbing by 14% to reach $4.9 billion. The group's EBITDA surged by 16% to $711 million, while EBIT rose by 15% to $444 million, showcasing an underlying business performance strength. Still, net profit remained relatively stable at $281 million. The commercial segment, particularly aerospace, proved to be a high-flier with a 32% revenue spike to $1.9 billion attributed to a recovery in engines, components, and rising demand in the P2F sector. Meanwhile, defense revenue grew to $1.6 billion, energized by a robust contract intake of $5.2 billion, an impressive feat considering the divestment of the US Marine sector. Global air travel in May 2023 nearly matched pre-COVID levels, signaling potential uplift for future MRO demands, especially with China's market re-opening.

Strengthening Core Segments and Transitioning for Future Growth

The company's dazzling performance in Commercial Aerospace, with a revenue surge of 32%, is tempered by a modest increase in Defense and Public Security (DPS) revenues. Yet, DPS stands out with extremely robust earnings before interest and taxes (EBIT), highlighting its profitability strength. Meanwhile, transformation and restructuring efforts in the Satellite Communications (SatCom) segment signify a strategic pivot aimed at future needs and improvements. This segment, despite facing challenges post-COVID, sets the stage for future growth, with a target to return to the profitability Satcom enjoyed before the pandemic hit its Aviation and Maritime customers hard.

Urban and Smart Mobility Ventures Poised for Earnings Accretion

Urban Solutions is gathering momentum, with major deliveries targeted for the second half of the year. A significant development is the New York Congestion Project, already underway and potentially contributing to earnings by the second quarter of next year. Additionally, TransCore, part of Urban Solutions, has seamlessly merged into the group and secured a historic contract over $1 billion post-acquisition, promising remarkable future earnings accretion. With big contract wins in Taiwan and successful integrations, the business is on a robust trajectory.

Strategic Restructuring in Satcom for Cost-Efficiency

The company is undertaking strategic measures to streamline the Satcom segment by consolidating platforms, thereby enabling cost savings and superior productivity, particularly in engineering and sales. These actions include workforce rightsizing, which is expected to yield annual cash savings of $40 million to $60 million and positively impact profit and loss statements by $30 million to $60 million as well. This commendable effort will bolster Satcom's competitiveness in the evolving satellite communication landscape, reinforcing its long-held market leadership.

Encouraging Financials with Strong EBIT and Operational Profit

Aside from impressive revenue growth within Commercial Aerospace, the company's operational profit skyrocketed by 60% year-over-year from $111 million to $178 million after adjusting for one-off gains. DPS showcased an EBIT of $301 million, benefiting from business expansion, effective cost control, and a positive margin mix. Although a loss on the sale of SatixFy impacted Urban Solution Systems (USS), the sector's EBIT is projected to match 2022's full-year figures, underscoring a positive outlook for the remainder of 2023.

Outlook: A Balanced Approach with Focus on Long-Term Growth

The company maintains a balanced perspective, addressing short-term challenges while staying committed to long-term growth opportunities. This approach is reflected in the Satcom industry and the confident stance on its business segments, ensuring that the USS segment's EBIT targets, despite current weaknesses, are set to align with the previous year's benchmark, nurturing investor confidence for the future.

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, welcome to ST Engineering's First Half 2023 Results Briefing. We will begin today with the presentation by our Group CFO, Cedric Foo; our Group's President and CEO, Vincent Chong will then give his remarks. After that, we will open up the floor to a Q&A session.

Without further ado, may I invite Cedric to give his presentation, please.

[Cedric Foo, Chief Financial Officer]

Yeah. Thank you very much for those attending in person here, very warm welcome. And those via the webcast similar warm welcome and good morning. Let me add my welcome to ST Engineering's first half 2023 results update.

First, I would like to bring your attention to slide 2, which states that amongst others the group's actual future performance outcomes and results may differ materially from those expressed in forward-looking statements. Slide number 3 is the agenda for today. I will be covering group highlights, business discussions, segment financials and order book debt profile and finally the CEO's outlook. Thereafter, Vincent will provide his opening remarks followed by Q&A.

First, group highlights. Slide 5 shows a summary of our first half 2023 results. It's a very strong set of results. Group revenue recorded a 14% year-on-year increase to $4.9 billion. Group EBITDA was strong at $711 million, up 16% year-on-year. Group EBIT was $444 million, up 15% year-on-year. Group profit before tax was comparable year-on-year at $351 million, and group net profit stood at $281 million, more or less flat for first half 2023 versus first half 2022. But it actually belies the strong underlying business performance, which I'll cover later.

Slide 6, the pie chart on the left shows Commercial Aerospace constituted 38% of group revenue. DPS 44%, USS 18%. DPS segment includes both local and international customers. So if you look at the pie chart that $2.1 billion is Defense Public Security and it includes local and international customers. It also covers Defense and Commercial Domains, and not just military domains and DPS' commercial businesses would include areas such as public security and safety, critical information infrastructure and others.

Hence the bar chart in the middle of the slide shows defense revenue as opposed to DPS revenue, which I just defined of $1.6 billion and this is a subset of DPS revenue of $2.1 billion. The group's commercial revenue increased to $3.3 billion in first half 2023 driven by the continued recovery in Commercial Aerospace. The Group's defense revenue increased to $1.6 billion in first half 2023, as I've just described.

Now, on the right-hand side of the slide, it shows first half 2023 revenue by location of customers. And for Asia 50%, the US 24%; Europe 20%; and others 7%.

Slide 7, as I said group revenue grew 14% to $4.9 billion and this is contributed by all segments. And it's despite the loss of revenue which we chopped up in first half 2022 since we have sold US Marine in November 2022. Debt revenue by US Marine in first half 2022 was $119 million.

Slide 8, this slide shows the revenue growth in the three segments. On the left Commercial Aerospace grew robustly by 32% to $1.9 billion. In the middle of the slide US Marine contributed $119 million in first half 2022. If we re-base this then DPS' first half 2023 revenue will be higher by $128 million or 6% growing to $2.1 billion.

On the right side of the slide, USS which is Urban Solutions and Satcom grew 18%, to $891 million contributed by Urban Solutions, which has TransCore in it and partially offset by Satcom.

Slide number 9 shows the first half 2023 EBIT, which grew by 15% all the way to the right 15%. In first half 2022, the group recorded an EBIT of $385 million, which is the first bar chart on the left the number right at the top. But this included a $72 million one-off pension restructuring gain as many analysts would have noted. And also in first half 2023 the TransCore transaction and integration expenses were lower by $16 million.

So if I take the net effect of the $72 million, which helped 2022 but was absent in 2023. And if I take the lower TransCore T&I expenses in 2023, first half which is a helped for 2023, I offset this two is $56 million. If I take $56 million out of the $385 million, I have the first bar chart of $329 million.

So if I take that as the new base, just to deconstruct so that you get the underlying business performance and with the business growth of $141 million, the first half 2023 base operating performance is $470 million, which is a very robust $43 million higher than first half 2022 rebase -- sorry 43% higher.

We also incurred a one-off SatixFy divestment loss, when we saw all the shares are SatixFy. And also Satcom is undergoing restructuring and really have incurred some severance expense. The total of this two is $26 million. And if we take this off, then the first half 2023 reported number is $444 million, which in itself even if we do not rebase the 2020, it's a 15% higher EBIT compared to first half 2022.

Next net profit, the difference between the two slides is obviously finance expense and the tax effects. So similarly, in first half 2023 net profit was flat at $281 million. That's the bar chart at the extreme right. In first half 2022 though, the group recorded a net profit of $280 million, which included $53 million and now it's not $72 million because of tax effects.

In first half 2023 TransCore transaction and integration expenses were lower by $12 million after-tax, which again a different figure from the one you saw before-tax. If we rebase both these items in first half 2022, there will be $41 million of the $280 million, starting with a new 2022 first half base of $239 million.

And then, add to that, business growth and cost savings of $109 million net of tax in first half 2023, the green bar $109 million and the higher finance costs debt after-tax of $48 million. The base operating profit would be 26% stronger. So at $300 million base operating profit, this is probably our highest in many years.

In first half 2023, as I mentioned before, we also incurred loss on the full divestment of shares is SatixFy and some severance expense to put Satcom in a better footing. This totaled $19 million after-tax. And all in, the group net profit as reported showed it as flat at $281 million despite higher finance costs.

Now let's go into some business discussions. Slide number 12 shows commercial aerospace revenue growth, for Q1 and Q2 for three years. First off as you can see in slide number 8 previously, the first half 2023 revenue was 32% higher year-on-year, at $1.9 billion and this was higher than pre-COVID level.

For the chart on the right, 2Q 2023 revenue was $983 million. So we are looking at just one quarter, second quarter of 2023, which represented a robust 35% growth year-on-year versus 1Q -- sorry versus 2Q 2022, yeah. So you see the 35% on the right side of the chart.

Strong recovery in Engines and Components businesses, together with P2F demand and high end of sales delivery enabled this growth. This segment also saw robust new contract wins in first half 2023 of $3 billion. including $2.3 billion in 2Q alone.

Slide 13, in the month of May 2023, Air Travel has recovered to 96%, of May 2019 pre-COVID level. So we're comparing May 2023 to May 2019, 96% of pre-COVID levels, so not quite the same level as pre-COVID yet, but 96%.

Of this 96% Domestic Travel leads and has exceeded the pre-COVID level at 105% of pre-COVID level, whilst, International Travel lags and is still below the pre-COVID level of 91% -- at 91%. International travel with wide-body aircraft provides more MRO workload for our Commercial Aerospace segment and has yet to recover fully.

Now if you look at APAC Airlines and their International Travel Recovery it is at 69% of pre-COVID level, with potential for higher MRO demand going forward especially with the reopening of China. And this expected APAC Air Travel trajectory represents further upside for our Commercial Aerospace segment, as we have several hangers in Asia Pacific.

Slide 14. Let's discuss DPS. This segment reported a $9 million increase in revenue, despite a loss of revenue from US Marine divestment in November last year. Rebasing for this, DPS saw a healthy 6% base business revenue growth. Strong contract wins of $5.2 billion was recorded in first half 2023. It's really very strong.

Growth in international defense business saw some early success with about $100 million or more than $100 million contract wins from customers in Europe and the Middle East. So as you can see, we have two very strong segments: Commercial Aerospace and DPS. And although DPS revenue grew modestly, when you look at the EBIT it is very, very strong. The one area that we are restructuring to address future needs is in the SatCom area.

Next Slide 15 Urban Solutions. We expect deliveries in Urban Solutions to be second half weighted. In June 2023, just a couple of months ago, TransCore received a notice to proceed for New York Congestion Project, which is a very positive development, as we have waited for this for some months yet. This go ahead means that this project – in fact installation has already begun and is scheduled for completion as soon as 2Q next year.

Transition for TransCore into the Group has also been very smooth. And several new contracts including the New Jersey, South Jersey contract worth more than US$ 1 billion, which is the largest contract ever have also been one post acquisition. TransCore is also pursuing other contracts including Urban Congestion Pricing, now that the New York notice the proceeds has been given. We have received many inquiries from other US cities.

It is also pursuing synergies, which is the basis of the M&A and pursuing various leads for road tolling in Southeast Asia. As well as the R&D around selling products of the ST Engineering Group into the US by using TransCore's channel. And there are some active discussions in that area as well. And we hope to deliver some good news in due course. TransCore is also positioning itself, not just for today but for the future and it has many interesting cutting-edge innovations and R&D in the pipeline.

As a result of all this, TransCore earnings accretion in the second year post acquisition as a target, which we announced when we bought TransCore remains. So we are confident that this will take place. And project deliveries are also weighted in the second half of 2023.

Earnings accretion as defined here, when we say TransCore achieve earnings accretion by the second year of acquisition, it has taken into account amortization of intangibles, transaction and integration expenses and also financing costs. So this is basically the net profit figure. The other part of USS is urban solutions-based business which is our smart mobility business. And as you are aware, we won many big contracts in Taiwan and the notices to proceed for the Kaohsiung Yellow Line and the Red Lines are on track.

So let me just devote a bit of time on Satcom, since it is an area that we are transforming and restructuring. Slide 16 talks to this. The Satcom business mainly iDirect was profitable before COVID. However, COVID impacted many of its key Aviation and Maritime customers. As you know, these two domains are where Satcom iDirect sells too predominantly. And this results in about breakeven performance in 2020 and 2021.

In 2022, however, which is last year, several factors impacted the profitability of Satcom. This included firstly, supply chain disruptions, which includes chip shortages which we talked about. However we expect relief to come by end of this year. Second, the remaining impact of COVID, many in the industry players like iDirect, as they are facing remaining impact of COVID, although the effects are lingering off.

Thirdly, near-term cost of restructuring, which we talk about. And this I think is a positive move by Satcom, as it is very decisive. And it really places Satcom iDirect in a much stronger foundation for future performance. And we also have a one-off divestment loss of $24 million, when we saw SatixFy shares.

Let me go into SatixFy a little bit. SatixFy is a company, which develops ASIC semiconductor chips. As ASIC is application-specific integrated circuits, basically for edge computing and iDirect Satcom uses such chips. The investment in SatixFy was made in 2014. So, it is some nine years ago for US$ 7 million to enhance collaboration and to tap on the ASIC technology of SatixFy. By now, nine years hence, affinitive technologies have become available and the collaboration has been successful and fruitful. Hence the original rationale of holding shares in SatixFy is no longer valid.

SatixFy went on listing through a leaseback mechanism in October 2022 4Q last year. And this investment was mark-to-market in our 4Q '22 results, pursuant to financial reporting standards, because there's a crystallized price in the IPO price. Subsequently, following the expiry of the sale moratorium of those original shareholders have SatixFy, pre-listing, when the moratorium expired, we sold all the shares that we have in SatixFy for about US$ 1.5 million. So actually the cash flow loss is $7 million minus $1.5 million yes. But because of the accounting ups and downs and divestment loss of $24 million was recorded. It's just onetime for this half.

Slide 17, now describes, what are we doing about it? And the actions we are taking for the Satcom business is as follows. Firstly, iDirect SatixFy uses several platforms. You may have heard of dialogue, velocity and so forth. And obviously, the industry is transforming from GEO, MEO, LEO. MEO even, HEO even, which is hybrid. So many form of satellites is -- it's a rapidly developing, but more nonetheless developing industry for the satellite players. And obviously at Satcom, modem and ground equipment provider has to keep up with these changes. So, we have now decided that actually we can build the new generation platform on top of one of these several product line, rather than a new platform in each of these product lines.

So, by doing so, we achieve two things: one cost efficiency obviously, because you are fixing one product line to be future-ready rather than three or four, and less engineering work is required. And secondly, more dedicated efforts to position this new platform to be multi-orbit compatible. So whether it's GEO, MEO, LEO, HEO and to be cloud-native and 5G conversion. And all this really is to kind of calibrate our solutions such that satellite communications either become the primary source of communications in remote areas across continents, across oceans or to be the redundant source even on terrestrial communications. And this is the vision which many of the big players are thinking about, connected everywhere, anyway.

Secondly, having done this converging of the platform, we now have streamlining opportunities. We need less engineering hours as I've described. So approximately, 50 employees were released in June and an additional 250 or so released in July and these are mostly in the US and Europe. This organization rightsizing will reduce the workforce by approximately 20% and improving our cost structure and productivity, particularly in engineering and sales and will enable Satcom to be more competitive in the marketplace. So we expect cash savings of $40 million to $60 million a year from this, as well as other continuous improvement efforts.

While the cash savings are between $40 million and $60 million a year, the P&L impact for those of you who are building a module, the saving is expected to be around $30 million to $60 million. So instead of $40 million to $60 million for cash, $30 million to $60 million for P&L and that's because the affected employees costs have been capitalized in the past to be amortized going forward and this amortization will continue until it tails down to zero. So that's for Stacom. We strongly believe and are confident that we have and we'll put it in a strong foundation for future growth and profitability.

Next, I will spend some time talking about the segment financials and then the order book. Slide 19, when we look at EBIT by segment, starting from the left, commercial aerospace, as we have discussed has a strong revenue growth of 32%, but if we take out the pension restructuring gain which was one-off in one half '22. Then the base operating profit increased 60% year-on-year from $111 million to $178 million.

In the middle of the slide, DPS posted strong EBIT of $301 million. This is very strong and boosted by business growth, cost savings and margin mix and also the absence of US Marine losses. So, we more than make it up for the US Marine revenue loss which we foregone. But on the EBIT side, the absence of US Marine loss clearly produced a very strong EBIT for DPS as a whole. So it is even at hindsight sight a good decision so far.

On the right side of the slide, for USS, lower TransCore transaction and integration costs of $16 million, weakness in Satcom as we have discussed, due to supply chain remaining COVID impact and the one-off loss on divestment of SatixFy contributed to an EBIT loss of $34 million.

Having said that, our Satcom business, especially iDirect continue to be a hubs and modems market leader. It has very strong brand equity in the market and very -- held in very high regard by customers. Particularly in the aviation maritime government and cellular backhaul sectors.

On the whole, we remain positive about the long-term prospects of the Satcom industry. It is going to be a highly connected world, and terrestrial alone will not cut it. And we expect the restructuring efforts that we are taking now to strengthen the foundation of our Satcom business for future profits and growth.

So, on the whole Com Aero and DPS performed very strongly. USS segment EBIT is expected to be comparable to 2022 for the full year of 2023. So, while Satcom is weak, we believe second half will be significantly strong. Sorry, USS as a whole will be significantly strong for second half, such as USS segment EBIT will be comparable to 2022, which was a profit of about $30 million or so.

Next Slide number 20 new contract wins. In second quarter of 2023, the group secured $4.7 billion of new contracts Commercial Aero recording $2.3 billion, DPS $1.9 billion and USS $0.5 billion. Together with those in 1Q 2023 $4.9 billion, the group secured a record $9.5 billion of new contracts in first half 2023, which brings me to Slide 21. With the strong contract wins we ended the first half with a record order book of $27.7 billion. I think some of you who have covered us in the past will remember numbers like $13 billion. Now it's almost $28 billion. This is a leading indicator of future revenue growth in future periods. And we expect to deliver about $4.4 billion in the remaining six months of 2023 out of this order book.

Now Slide 23 discusses our debt profile. As you know in May this year, we issued another tranche of US$500 million three-year fixed rate bonds with an effective yield of 3.3% after the amortization of U.S. Treasury Lock's gains. The full amount of T-lock gains of $32 million that remained on the balance sheet. If you recall we had $92 million we amortized $60 million that it was $32 million in the balance sheet is now fully applied. Half of this will be amortized over the tenor of this new three-year bond I just spoke of. And the remaining half is realized as finance cost reduction in first half 2023 given that we have no intention to issue any more bonds in the near term.

As of 30th June, 2023 total borrowings was $6.2 billion. That's the third bar chart. This is lower when compared to $6.5 billion at the end of 2022 a slightly higher compared to March 2023. However, we expect to reduce borrowings to meet $5 billion by end of 2023. And as a result, we will do so to loan repayment largely from strong operating cash flow and aviation asset sales to joint ventures.

For 2023, we expect the Group's weighted average borrowing cost to be in the low 3% range. And this is a figure we have shared previously and it stands. For next year, we expect the group's weighted average borrowing cost to be in the mid-3% range. Even if we assume -- and this is the underlying assumption that the Fed with hikes U.S. our Fed funds raised by a further 25% post July until before the end of the year. So even with one more hike of 25 basis points, we expect the group's weighted average borrowing cost for next year to be mid-3%.

For our interest rate debt profile with the issuance of the three-year fixed rate bond, fixed versus floating debt proportion was rebalanced to 65%, 35% economy. Our credit rating remains strong. Moody's maintained our credit rating at AAA, but however favorably changed the outlook from negative to stable as recently as April this year and S&P reaffirmed our credits rating of AA+ and stable in June 2023, as part of their annual review.

Finally, we'll end with the Group President and CEO's message. And let me just relate, it's not that long. Our group performance in the first half demonstrated the strength and resilience of our business portfolio. This is reflected in the strong recovery of the Commercial Aerospace segment and the strength of the Defense and Public Security segment.

Despite near-term challenges in our Satcom sub-segment, decisive steps are being taken to restructure and transform this business, so as to be future rating. Consequently, we expect Urban Solutions and Satcom, the USS segment, full year 2023 segment EBIT to be comparable to 2022, supported by a significantly stronger second half 2023 for this segment i.e. the USS segment.

The target for TransCore to achieve earnings accretion from the second year post-acquisition remains. We remain very focused on delivering on our record high order book of $27.7 billion to achieve growth and value for all our stakeholders.

And this marks the end of my presentation. Thank you.

[Operator]

Thank you, Cedric. May I now invite our panelist to the head table. The panelist this morning are Vincent Chong, Group President and CEO; Group CFO, Cedric Foo; Ravinder Singh, Group COO, Technology and Innovation and President, Defense and Public Securities; Tan Lee Chew, Group Chief Commercial Officer, Market Development and President Smart City and Digital Solutions; and finally, Jeffrey Lam, President of Commercial Aerosapce.

I will now hand over the floor to Vincent to deliver his remarks. Vincent, please?

[Vincent Chong, Group President & Chief Executive Officer]

Good morning. Can you hear me?

[Operator]

Yes, Vincent.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. Good morning to all of you at the ST Engineering hub and participants who are joining us virtually, good morning. Welcome to ST Engineering's financial results briefing for the first half of 2023. Now, Cedric has delivered the full financial presentation for the first half of 2023, reflecting the strength and resilience of our business portfolio.

As you delve into details of our first half performance, the strengths of the group become evident. Even as Urban Solutions and Satcom segment faces near-term challenges, the strong operating performance of the other two segments, namely Commercial Aerospace and Defense and Public Security, enabled the group to achieve a strong first half of 2023 with base operating performance of 26% year-on-year improvement in net profit on the back half of 14% year-on-year increase in revenue, as Cedric presented.

We reported that group revenue was 14% higher year-on-year despite the divestment of US Marine and that our EBIT was 15% stronger year-on-year despite Satcom weakness in the near term. As you are well informed, we have been keeping the market appraised of the near-term Satcom witness for a while now and our internal transformation as well. We have now taken decisive steps to establish a stronger foundation for growth. In fact, we have been doing so in the last year or two.

We have called out the impact of certain variables and non-recurring one-offs, which resulted in flat PBT and net profit in first half 2023. However, as I just mentioned, our base operating performance was stronger at the net profit level with a 26% increase year-on-year despite Satcom weakness and higher finance costs.

For Commercial Aerospace, we were able to almost make up for the $72 million pension restructuring gain in the first half of 2022, which did not recur in first half 2023 despite that we were able to make up for the one-time gain in 2022 with base business improvement and cost savings initiative. And of course, this Commercial Aerospace recovery traction continues to be very good and very strong as Cedric also showed to you earlier on.

Now let's go on to our segment performance and strategic outlook for the rest of the year. We are optimistic about Commercial Aerospace continued recovery. which has rebounded to its pre-COVID level. Excluding pension restructuring gain, which was one-time in first half of 2022, first half 2023 EBIT improved by 60% year-on-year. This is the base operating performance result of our Commercial Aerospace segment.

As we continue to focus on sustaining this segment's growth and improving the learning curve of freighter conversion program across our conversion sites, we will actively seek and capture productivity benefits. While global air travel is fast approaching pre-COVID level international air travel in Asia Pacific, however, has only reached about 70% of its pre-pandemic level.

Further, as we align our Nacelle production rate to that of the OEM, we noted that Airbus ramp -- pace of ramp-up including for A320neo will continue to depend on its supply chain's capability to perform.

Now, I'll now touch on Defense and Public Security segment, which also recorded strong results in first half 2023. We reported higher revenue despite the divestment of US Marine and stronger EBIT of 41% better than first half of 2022. That reflects the effect of a high-graded portfolio and a favorable margin mix.

The higher margin mix or better margin mix observed in the period was partially attributed to the lumpy nature of project revenue and profit recognition and diverse margin mix in defense-related contracts and this can lead to fluctuations as you may have already noted from following us over the years in the segment's overall blended margin from time to time.

On International Defense, the segment made headway securing new contracts of over $100 million in the first half of the year. These new wins further affirm the value and appeal of our defense solutions, highlighting the progress we have made in cultivating and establishing presence in our target markets.

Moving on to the Urban Solutions and Satcom segment. While revenue grew EBIT was impacted by weaker Satcom performance due to supply chain disruptions including chip shortages, remaining impact of COVID, near-term cost of ongoing Satcom business transformation and a one-off loss from the divestment of satisfied shares. Excluding Satcom weakness and the onetime divestment loss, USS EBIT in the first half of 2023 was $30 million higher, compared to first half of 2022 attributed to a combination of business growth, cost savings and lower TransCore transaction and integration expenses.

Earlier you heard the updates from Cedric on how TransCore is pursuing growth and synergies. And notably how the team is focused on executing the New York Congestion Pricing project since receiving the notice to proceed in June or a couple of months ago. This is scheduled for completion by the second quarter of 2024 and spring of next year.

With this in view, our target for TransCore to achieve earnings accretion by second year post acquisition remains. And as explained by Cedric being accretive, earnings accretive means TransCore is generating sufficient profits to cover financing costs, integration costs as well as amortization expense.

More on SatCom elaborating on what Cedric has said. The business has had a strong track record of profitability until COVID hit. While it faced the negative impact of the pandemic, it is essential to recognize that it was not the only factor reshaping its performance. Over the past three years, the Satcom industry has been undergoing significant transformation as Cedric explained, driven by industry consolidation, technology advancements and disruptions from the development of new satellite constellations. These changes coupled with the effect of supply chain constraints and chip shortages during COVID have collectively presented challenges, as well as opportunities.

The losses incurred in 2022 last year were partly attributable to chip shortages and remaining impact of COVID, call for a review to ensure that our business continues to offer best value to customers and stakeholders. This led to the strategic review. As you have just heard to align the Satcom iDirect organization structure with evolving needs of the industry and to ensure sustainable growth in the long-term.

The strategic initiatives, which followed aim at enhancing efficiency optimizing costs and streamlining roles across functions and operations will yield $40 million to $60 million of cash flow cost savings per year -- each year for the next five years. Meanwhile, we remain positive on the long-term growth prospects of the Satcom industry and we'll continue to invest in strengthening our product market, leadership as well as Satcom capabilities. The business is also working towards streamlining its best-in-class technology into a single next-generation platform as Cedric described, meeting the needs of customers in an industry undergoing transformation.

With the restructuring being undertaken, we expect Satcom performance in the second half of 2023 to be materially better than first half of 2023. We expect 2024 to be stronger than 2023 for Satcom with the absence of onetime costs from the divestment of Satcom shares as well as improvement -- SatixFy share, sorry, as well as strengthening of our base business.

In 2024, there would be a cash savings of about $50 million arising from the organizational rightsizing and continuous improvement initiatives, which we described. Of this about $30 million will flow directly into Satcom EBIT, excluding the impact of inflation on base business, which will be well-supported by revenue growth. We will provide an update on 2024 Satcom outlook when we have our full year 2023 results.

Taking all the above in and that Urban Solutions is second half weighted this year. We are targeting and expect the Urban Solutions and Satcom full year segment EBIT in 2023 to be at least comparable to the prior year. On new contracts, we are pleased to share that our year-on-year total contract value increased more than 70% to $9.5 billion in the first half 2023, which is a very strong set of performance of contract wins. This comprises $4.7 billion for the second quarter and $4.9 million for the first quarter, which we announced in May. We are determined to build upon this strong contract win momentum going forward. And you can refer to slide 20 in the presentation material for new contract details which Cedric had also highlighted. Lifted by these new contracts and net of revenue delivery in the first half, we ended June with an all-time high record order book of $27.7 billion positioning us very well for growth.

In summary, our group's overall strength has been evident from our first half 2023 results, notably backed by two strong operating segments Commercial Aerospace and Defense and Public Security segments. While Urban Solutions & Satcom segment is impacted by Satcom, we are taking decisive steps to address the near-term challenges to enhance its competitive position and we are already seeing early results.

Additionally, Urban Solutions & Satcom segment profitability will be bolstered by contributions from a Smart Mobility business of which TransCore is part of. We expect Urban Solutions & Satcom full year 2023 segment EBIT to be comparable to 2022 supported by a significantly stronger second half 2023 for the segment. The target for TransCore to achieve earnings accretion from second year post acquisition remains.

Next, our record order book continues to be a leading indicator of growth. We will build upon our performance in the first half, as we navigate the operating environment across our business segments and achieve sustained growth throughout the remainder of the year and beyond. While we are not providing specific guidance of profit or revenue guidance for the full year given the dynamic market conditions, we have offered perspectives for our first half 2023 results that position us on a very strong fitting.

Lastly, our Board of Directors has approved a second interim dividend of $0.04 per share which shareholders will receive on 1st September 2023. So on that positive note, let us move to Q&A and we'll address the questions that you may have both from the participants in the room here or as well as those who dial in virtually.

[Operator]

Thank you, Vincent. I will now open up the floor to our participants in the room first. [Operator Instructions] And we have our first question from the floor please.

[Rahul Bhatia, HSBC]

Hi. Rahul Bhatia from HSBC. Congrats on strong sets of results. Three questions from my side. First, the CA and DPS divisions had a strong EBIT margin in first half, could we consider this as a base for future, or were there some one-off positive factors helping the margin? For instance, I see aircraft sales of $100 million in 1H, not sure if this is very high margin or any other big contract deliveries that happened in DPS division that -- which had a high margin?

Second, could you provide more color on the key levers that drive your view on TransCore earnings accretion? Is it more from high revenue, or do you expect some level of cost savings as well, or the project like in New York Congestion are they higher margin than previous margins? Third, on Commercial Aerospace. In Q2, the revenue was close to $1 billion. Could I check if there is more space in terms of hanger availability or labor to go further higher from here in terms of revenue? Thank you.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. I would ask that to answer in this sequence. First, I'll ask Ravi to talk about DPS margins first half whether there's a proxy for second half in terms of margin and then -- for Lee Chew to talk about TransCore accretion what's the driver? And then for Jeff to talk about hangar capacity whether we have the room to grow. But you know that we are continuing to build capacity, building hangar complex in Pensacola the work in progress, but we're also building hangars elsewhere where I'll let Jeff talk about that later. So maybe I'll let Ravi first address the first question.

[Ravinder Singh]

Rahul, thank you for your question. So first of all we are very happy with the very strong margins that the team has achieved for the first half. And I think as Vincent also alluded to it, there are two reasons why our margins are very strong. I think firstly without US losses of US Marine and secondly, I think the core business has done well as we shared the revenue has gone up by 6%. And if you look at each of the business areas all of them have grown quite steadily. One reason why the margin is very strong the first half is of course because of project delivery because of timing.

So overall, I would say that the first half is very strong. We were obviously moving forward, we won't see the losses from US Marine. So that will help us. And then the rest of it of course depends on the delivery that we have for the next six months. Our new order wins for the first half is $5.2 billion which is very strong, even if you look back last year that's close to what we secured for the whole year. So I think from that point of view we are in a good position and we do hope with the right opportunities to deliver good margins.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. Thank you. Yeah.

[Lee Chew Tan]

Thanks, Rahul for the question. So earnings accretion for us naturally will factor in revenue and revenue as a result of project milestones and project profiles that we have. We also look at the balance sheet that we have funds, T-lock gains, et cetera. As we ponder and consider all these elements, we are confident that the commitment that we made to be earnings accretive by second year still remains.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. Thank you, Lee Chew. Now, Jeff.

[Jeffrey Lam, President-Commercial Aerosapce]

Thank you, Rahul. In terms of capacity, we continue to grow capacity in line with market demand. So you know, we have invested in the LEAP engine capability. We're building more space to deliver more engines. In addition, we are completing our fourth hangar in Guangzhou, and we intend to break ground in the second half of this year at three additional sites. In Pensacola for hangars 3 and 4 in Otto China for new hangar also in Singapore for additional hangars. So we continue to look to build capacity in tandem with market demand.

In terms of operating margin, obviously in the first half we had some one-offs. We continue to be hopeful for the second half. Essentially, we have already achieved recovery from COVID, and we are moving into a growth phase and we expect to see continued steady gradual growth in terms of Naccels delivery and our P2F conversions, we also are adding three additional sites this year that are third-party modification sites. In addition, as you can see the recovery in the engine and component business, with the recovery of the air traffic is also steady and strong. So we are hopeful for the second half and hope we can continue to work towards good outcomes.

[Vincent Chong, Group President & Chief Executive Officer]

Yeah. Thank you, Jeff. So I'd like to build on what Jeff said. One of the strength of our Group is that, we have the financial capacity to invest across the business cycle. So even in the trough of COVID, we did not stop our investments in building new hangars. Second hangar in Pensacola, third hangar in Guangzhou, they are both operating. And we continue to look at opportunities to expand including in Otto, there was discussed in the thick of COVID. So that is allowing us now to capture the benefits of the strong recovery in Commercial Aerospace. And this is a point which we mentioned at the Investor Day conference towards the end of 2021.

So the benefits are coming through. We also said, during our Investor Day that we expected our Commercial Aerospace to recover the pre-COVID level in 2024, but we also said, in the last one year or so that there's a good chance that we may get to pre-COVID level this year. And as of first half of 2023, we're already at that performance level. So very pleased to inform the market that our Commercial Aerospace is really doing well. Yes, Siew Khee?

[Siew Khee, CIMB]

Can I just check again the annual P&L savings from divesting -- SatixFy is $30 million or $30 million to $60 million? That's my first question. And also for USS wasn't sure whether you actually answered whether the second half strength -- would it come from higher revenue cost savings or better margin from executing the US New York congestion contract? And also, can I just check how much was chip repair orders in this half? We note that chip repair has actually been coming back since last year and whether you are seeing that as growing or sustainable? And what kind of vessels are we looking at? Just following up, on Aerospace very strong EBIT margin this half. What was one-off and how much was it?

[Vincent Chong, Group President & Chief Executive Officer]

Can you repeat your last question?

[Siew Khee, CIMB]

I think, Jeff mentioned that there was a one-off in Aerospace, because the EBIT margin was quite strong this half. So I wanted to check what was it? And how much was it?

[Vincent Chong, Group President & Chief Executive Officer]

Okay. So we'll go in the sequence which you asked the question. First of all, the annual savings of $40 million to $60 million is not from SatixFy divestment. This is from our own internal transformation streamlining, right-sizing of the workforce and continuous improvement. So, let's just be clear. But then I'll let Lee Chew later on build on this to answer your question with more specificities. And then for USS, I'll also let Lee Chew talk about why do we expect stronger second half. But it's a combination of both. Satcom doing better and then Urban Solutions being second half weighted as we mentioned earlier on call, but I'll let Lee Chew expand on it. And then Ravi to talk about chip repair orders in the first half. And then Jeff to talk about the one-off aero, if that's okay. Go ahead.

[Tan Lee Chew]

On USS, for second half, we are expecting revenue to be stronger. As we mentioned, we are second half weighted on revenue. We are also expecting the rightsizing of the Satcom organization. Cedric mentioned that across June and July, we have taken out 20% of our workforce. So the savings, from that is going to flow also into supporting the second half P&L and business.

Specific to the MTA contract, obviously, the fact that we are starting installation for the congestion pricing project in Manhattan, will contribute to the project milestone revenue that I talked about earlier, explaining to Rahul's question. So in summary, it's a combination of higher revenue that we are expecting, both from projects that we will see delivered in the second half as well as recovering from product availability in the second half for Satcom. And on the savings side, we are seeing some of the transformation activities we are implementing or we have implemented in the first half to benefit us on the bottom line for second half.

[Vincent Chong, Group President & Chief Executive Officer]

All right. Well, thanks Lee Chew. Ravi, talk about the chip repair business.

[Ravinder Singh]

So, on chip repair. Firstly, it's not meaningful to our order books, was in chip repair about 80% of the work is delivered in the year that we acquired. So, a bit more faster delivery, in terms of chip repair for first half, we've done well. And actually it looks like we are going to be full for the rest of the year. So, it's very sustainable business and also a very good margin business for us.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. Which is a good situation for our chip repair business. We -- our team has been, what we call very selective in the customer mix, at this time. And so, I think we are off to a very good foundation, even for chip repair.

[Jeffrey Lam, President-Commercial Aerosapce]

Okay? As you are aware that we did sell aircraft to our joint venture company, okay? And obviously, we had a fair reasonable return based on the holding period, we had on those aircraft. We should not forget that we operate in a very competitive market. And I should not forget to mention, that we continue to face challenges in the market around inflation of wages, and raw materials as well as availability of labor, and the vendor supply chain continues to present challenges to our pitting [ph] operations for P2F. So we are cautiously optimistic going forward. Obviously, we want to do our best and be able to actively manage all the market challenges, while focusing on customer needs and growth. Thank you.

[Vincent Chong, Group President & Chief Executive Officer]

Well, just so that you know, when we divest aircraft into the into joint ventures, this is in alignment with our business model, as we have described over the last few years of our aircraft and engine leasing, so that we continue to focus on our core which is MRO -- end-to-end MRO services and passenger to freighter conversion. But we look for partners, as we move along for our aviation leasing business. So, what we are taking -- the actions that we have been taking are very consistent with this business model.

[Unidentified Analyst]

Good morning. Thank you for this opportunity. Just a few questions from me. So, in terms of the Satcom business restructuring, I understand that cost savings from workforce reduction will became immediately. But what's the projected time line to realize the full annual cost savings of between $30 million to $60 million? Additionally, could you also elaborate on the potential top line impact to the Satcom business, as a result of shifting our focus to a single next-generation platform? And one more question. So P&W recently disclosed contamination in more than 1,200 office GTF engines. Do you foresee any impact to the Commercial Aerospace segment on this development? Thank you.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. I will let Jeff later on talk about the GTF engines, whether there are any impact. And then just so that you are clear we, – so, thanks for the question. The savings from our organizational streamlining and continuous improvement is expected to give us $40 million to $60 million of cash flow savings per year.

Next year, we expect the cash flow savings from this $40 million to $60 million range to be $50 million, of which $30 million would flow down directly as EBIT improvement, because not all the cash savings are related to direct OpEx, because as Cedric mentioned, some of those are amortized -- and capitalized and amortized in the past.

So, let me just repeat. Next year's cash flow, cash savings versus this year from these initiatives that we have undertaken, would yield $50 million of cash flow savings but then $30 million of EBIT improvement next year.

[Tan Lee Chew]

So let me answer the question on top line impact as we converge to one single next-generation platform. As we make the decision to develop on top of the Velocity platform that Cedric was mentioning, we've actually been very much in discussion with customers and we have taken their inputs. So the way to look at it is that as we deliver a multi-orbit enabled platform at the end of that journey. We are going to take the needs of our current customer in maritime in aviation to give them a platform, leverages the best-in-class technologies that we have on Velocity, which is a proven mobility platform – and layer on top of it the flexible wave – the wave form that we have in dialogue.

So we're taking the best of multiple platforms and then providing the customer a path forward and a journey into this next-gen platform. So we do not see that as a necessarily a negative impact. In fact, we see that as a positive impact as we get them to be more ready in their ability to operate multi of it and also their ability to operate in a terrestrial as well as satellite come virtual. So hopefully, that answers the question.

[Vincent Chong, Group President & Chief Executive Officer]

Okay. Thanks, Lee Chew. I also want to just build on the answer that I provided earlier on the EBIT impact and cash flow savings from our transformation. Although the EBIT impact or positive help will be $30 million next year, over a period of time this annual effects will become $16 million as it gets fully depreciated. So the EBIT help next year is expected to be $30 million from the streamlining exercise.

In about five years the full effect of $60 million will be realized per year in terms of EBIT. This is just accounting. In terms of real cash flow savings it's $60 million. Earlier on I also mentioned, this is just a benchmark against our starting point 2022, 2023 in terms of the difference in cost.

Our base business will also go through as in the effects of inflation. But as I also mentioned, revenue growth were more than offset or support this inflation as we always do. Cost savings exercise will continue to be done. And then our revenue growth will of course have to take care of more than absorb the inflationary pressures as we do for all our businesses.

[Jeffrey Lam, President-Commercial Aerosapce]

Okay. So a quick response to the Pratt & Whitney, GTF Engines issues in the market. We do not currently overhaul Pratt & Whitney GTF Engines and we also don't deliver Nacelles for the Airbus aircraft powered by the GTF engine. So it will not directly impact us.

Nevertheless, the market will see some short-term undercapacity for MRO to address these challenges to change out these contaminated components. The pressure on Airbus will also be there in terms of the need for product we need to supply spare engines into the market to support existing fleet rather than supply new engines for the delivery of new aircraft. So that's going to be kind of a double impact on the MRO market as well as the new MIC market. Thank you.

[Unidentified Analyst]

Thank. Okay. I'd like to follow up a little bit on SIew Khee's earlier question on the Commercial Aerospace margin. I also heard Jeffrey mentioned, there was some well kept the margins in the first half. But just now Jeffrey was saying – talking about the disposal of the 11 aircraft to the joint venture. But I thought this one was only announced yesterday and the impact has not been recognized yet, right? So it should be recognized in the second half? So okay, so if it's recognized in the second half, the question is – my question is what is the size of the disposal? And what is – he also mentioned there will be a good holding investment return from the holding period. So I wonder what is the size of the disposal gain? Yes. That's my question. Thank you.

[Jeffrey Lam, President-Commercial Aerosapce]

I was really referring to it earlier disposal. We do these transfers actively. As Vincent explained, it is our strategy to work with partners in the market to be able to offer complete solutions – so we are actively doing that all the time. So in the first half we've also done that and obviously, in the second half as we announced, right? So it is of course inappropriate for us to review the size, but as I said, we've had a certain holding period on these aircraft. We also process them. Sometimes we do work on them. And therefore, when we dispose of them to the market and to partners. We do have a fair reasonable gain as a result.

[Vincent Chong, Group President & Chief Executive Officer]

So, the key word there is that fair reasonable gains. But I think it's more important to look at the business model. So, yes, we do expect some fair compensation for 11 aircraft and we would be a positive contribution. But importantly, we are just moving towards our business model where we work with partners, while we continue to had value in the services -- end-to-end MRO services, repair management, fee management that we are very good at and we have been doing this for a few years now.

So, for various business reasons, sometimes speak to market. We sometimes acquire the aircraft on our own first, add value to them before we transfer into the joint venture. So, in case you wonder why there is a sale to JV, but the original intent has always been eventually when the aircraft is ready will be transferred to the joint venture, be it a converted aircraft or just a typical commercial aircraft for these.

And actually in Cedric's presentation, we also talked about the expected reduction in borrowings at the end of the year by some $600 million or $500 million, $600 million to mid-$500 million. Part of it is from this capital recycling that we're doing with our aviation business, but then the other part is really our strong cash flow. So, we can say two-thirds, one-third. So, one-third from strong cash flow and two-third of that reduction will come from recycling our capital from the aviation asset business.

[Unidentified Analyst]

Hi. Thanks so much for the presentation. I have three questions here. The first question is really about the order book outlook. We have a very strong order book and contract wins year-to-date. But looking forward to second half and maybe longer term, which are some of the categories we were more positive on in terms of the segments.

And I also saw in the second quarter, we did win some defense contracts in Europe and Middle East. Do you mind to share a little bit on that? I understand there's some confidentiality behind the customers? And maybe on TransCore as well part of the objectives is always to bring the capabilities to Southeast Asia. Do you mind to share a little bit about any potential negotiations we're having in ASEAN? And what kind of differentiation that we have towards some of the [indiscernible] operators in the region like [indiscernible] in Indonesia?

And then last question is on P2F EBIT margin. I think we previously look at this business turning accretive. Are we on track on this business? And what is the medium term outlook for the margins?

[Vincent Chong, Group President & Chief Executive Officer]

Okay. All very good questions Shawn [ph]. I will let Lee Chew talk about TransCore pipeline in this part of the world which we spend a lot of time on. So, we can share some info with you and of course, our differentiation. I mean just keep in mind that we are executing the congestion pricing project in Manhattan, the most popular city in the US, which speaks to the rigor of our solutions and the trust that our customers have placed on us which we really appreciate.

But then how can we then bring those technologies out from the United States. And I think there are good developments and good prospects in this region as well but I'll let Lee Chew talked about them in -- at a higher level given the sensitivity as you mentioned.

And I'll let Ravi talk about the defense opportunities in Europe and Middle East and where were some of the wins and then Jeff to talk about the P2F accretion that we talk about and we are certainly on track versus what we have told you.

Order book is something that we don't really give forecast because it comes in lumps and pieces sometimes. But we made it a point to call it out as our record high because it's indeed of material improvement versus before. But quarter-to-quarter half-on-half we really cannot predict.

But one thing I would say is that our order book improvement is contributed by all three segments. It's not like we have a ledger [ph] and then the other two is good, but all three were giving good traction of albeit a different magnitude, but all three segments recorded stronger order book this half.

Okay. So, I will let maybe Lee Chew first talk about the TransCore and then Ravi talk about defense.

[Tan Lee Chew]

Okay. Thank you, Shawn for the question. So, in terms of opportunities outside of the United States, particularly we've referenced to Southeast Asia, we have built a very strong pipeline. Of course these deals take time to land and they are in different phases of pursuit as we speak.

Within Southeast Asia we are looking at opportunities across Malaysia, Philippines. We are looking at opportunities also in other parts of Southeast Asia, including Indonesia and Thailand.

And in fact you asked about the differentiation. TransCore is a company that's established itself for 80 years in the United States. And eight out of 10 toll agencies in the United States use TransCore's tolling solution. And what we are doing right now in terms of talent exchange is to get the knowledge and the experience of how they manage some of these toll projects across to implementing projects here in Southeast Asia, but of course the operating model needs to be different as well. So we're also looking at how do we build out the right delivery model, leveraging the know-how, as well as the experience that we have. But add to it, the knowledge that we have in Southeast Asia from the Smart City projects that we have done out of the ST Engineering Urban Solutions set up and marrying the two assets and also marrying our -- or combining our capabilities both ways to add to the synergies that we are building right now. So, good pipeline, capabilities exchange and we are also looking at Cedric was mentioning earlier, exploring new technologies as we cover opportunities outside and within the United States.

[Vincent Chong, Group President & Chief Executive Officer]

Okay, thank you, Lee Chew. Ravi?

[Ravinder Singh]

Yes. Shawn, thank you for the question. So first of all, I think as we have shared previously, we have put in a very concerted effort to develop our products and solutions for the international defense market for the last couple of years. We're also putting quite a bit of effort in terms of go-to-market, selling people overseas, participating exhibitions, finding partners and talking to end customers. And I think, as it would be obvious -- the defense business is one where partners -- local partners are very, very important, because typically the countries that buy defense equipment one need to be sustained over a long period. So that's something that we've been working on for quite a while.

I would say that for the first half in the January, the momentum, we are getting -- we're seeing good traction, very good traction in a couple of areas. I'll just mention them. First of all, our 40mm sales we've had quite good sales in the first half. And even as recently as last month, we continue to get orders as some militaries, especially in Eastern Europe build up the military capabilities. So we are seeing that. We sold 120 motors to the Middle East. We are also doing reasonably well in our training and simulation solutions, especially in Europe. We are working with some of the western militaries there.

On our USC autonomous mass, we have had some good traction. That's an area that of interest to many militaries around the world from Australia, to the Middle East, to Europe and even in the US and we've been building up the engagement and doing trials and we hope that that will convert into more significant sales in the future. And in the C-130 area, as you know, we do the C-130 MRO and upgrade. And actually the team has done really well. I think most of our capacity for this year is really taken up, thanks to the good work of the team and of course the reputation of defense aerospace in Singapore for being able to do the MRO upgrade with good quality and also on time.

And I just wanted to add, in fact our Marine business, not only are we continuing to support the UAE PV Program and that we managed to get some variation orders there. But we also do MRO work for foreign vessels coming into the region. So we've done some work for the US, for Australia, New Zealand. And this actually, we put it under ship repair and maintenance MRO and this is actually giving our Marine business steady revenue.

So, overall, the Defense business, I would say that we are gaining traction. We are making good inroads, but we continue to want to grow this business and in the platform area which as you know we do develop and manufacture platforms. We are working with a couple of strong partners especially in Europe and Middle East. And we hope that in due course, there will be some portion to convert these opportunities into actual contracts. But of course, we have to remind ourselves defense business gas station period is very long. And the journey is quite challenging, but we are quite determined to take on these opportunities and see whether we can go further especially in the platform business.

[Vincent Chong, Group President & Chief Executive Officer]

Thank you, Ravi. So, as you go you heard, we have a lot of irons in the fire when it comes to defense.

[Jeffrey Lam, President-Commercial Aerosapce]

The interest in the P2F business, we were gross margin positive in the first half of '23. We target to be EBIT margin positive for full year '23. In addition, in the medium term, by 2025, we target to achieve high single-digit EBIT margin and hopefully double-digit EBIT margin thereafter.

[Operator]

Okay. We will now move on to our online analyst participants. Lorraine from Morningstar, we will open up your line now.

[Lorraine Tan, Morningstar]

Hi. Goof afternoon. I just want to follow-up on the order book contract wins fleet for the Commercial Aerospace segment. I was just wondering, whether the new -- the contracts are they new clients or renewals? And which regions they are from? Thank you.

[Jeffrey Lam, President-Commercial Aerosapce]

Okay. It's a combination of new and existing clients, specific to P2F conversion we had a significant contract win from a lessor. And this gave us a very big leap. It's probably not what you would see every day. But certainly we hope to do more of these sizable contracts. We also have MRO contracts, long-term MRO contracts that we signed with existing customers. So it's a combination of both of those.

[Vincent Chong, Group President & Chief Executive Officer]

Thanks Lorraine for the question. I hope we answered your question. While we wait for the next question, I would invite Cedric to give a little bit more context to the interest rate forecast, and then I thought we may have so good for Ravi to talk about the digital business, which we had highlighted in our Investor Day, which is really making good progress. So maybe while we wait for the next question, Cedric please.

[Cedric Foo, Chief Financial Officer]

If you refer to slide 23, we did talk about what our weighted average borrowing cost would be like this year and I stated it as lower 3%. So that stands. And we also made an estimate of what our weighted average borrowing cost will be like next year in 2024. And I said it to be mid 3% even assuming that the US Fed increases the Fed run rate by 25 basis points after the July action, so from August to end of the year. And I should add now that even assuming that there's no rate cuts in the whole of 2024 and still our weighted average borrowing cost would be mid 3%. In fact you read the little share some banks are predicting their rate cuts from 2Q 2024, but we haven't taken that into account when we arrive at mid 3%.

[Vincent Chong, Group President & Chief Executive Officer]

Cedric, thank you.

[Ravinder Singh]

Vincent thanks. So on our digital business, which comprises software and AI, cyber and cloud, we are making -- we are growing steadily and we are on track for higher revenue growth this year.

On the cyber side of the house, we continue to sell the encryption products, new SOCs as well as SoC services and also provide cybersecurity services. On the cloud side, we continue to win data center opportunities help companies migrate to the cloud, their current solution as well as build new software solutions on the cloud.

I just want to mention very quickly about generative AI is something that we all read about. So our team in our engineering center as well as in digital systems have been building and working on generative AI. There are two areas that we are working on. One is using generative AI for video analytics. It's something that we really develop and we are delivering in some projects. And the others using generative AI to support analytic work for some of our customers. And I think our strength is the ability to develop generative AI products, which are what we call on-prem but not using the cloud and not putting the customers' data on to the cloud. So those are new opportunities and our team is developing solutions and we are quite confident that this will be -- and even that will continue to drive our digital business.

[Vincent Chong, Group President & Chief Executive Officer]

Yes. We set a target of tripling our digital business revenue to more than $500 million by 2026. So, I think our progress will tell us that we will certainly meet that target and in fact outperform that target by 2026. So more to come, but we are certainly making good progress.

[Operator]

We will open the floor again to our physical participants. Do we have any next question? Okay. If not maybe I would just invite Vincent to give his closing remarks before we close event today.

[Vincent Chong, Group President & Chief Executive Officer]

Well, thank you for your attention. Thank you for joining us today for the results briefing. As you can see our first half results really show that the underlying business is very strong, although we have some near-term challenges in Satcom, we are taking very decisive action to address them and we're already seeing early results. So we'll share more with you as we progress. But for now unless, or rather if you have any further questions you can reach out to us after this call. But I want to thank you for your attention and wish you a very pleasant weekend ahead. Thank you very much.

[Tan Lee Chew]

Thank you.