UOB Kay Hian analyst K Ajith has downgraded his recommendation on Singapore Technologies Engineering (ST Engineering) to “hold” from “buy” as he deems the counter’s valuation multiples being unlikely to expand further despite its continued growth in orderbook.
To this end, he has lowered his target price estimate slightly to $4.25 from $4.26 previously.
“We value ST Engineering on an enterprise value (EV)/Invested Capital basis and have raised our terminal growth rate assumption to 2.7%. At our fair value, ST Engineering will be trading at 25.2 times FY2022’s estimated earnings,” he writes in an Aug 13 report.
Ajith also sees the group’s earnings for the 2HFY2021 likely to “decline significantly” h-o-h “barring a significant milestone completion of orderbook”.
“We estimate an $88 million h-o-h reduction in earnings for 2HFY2021,” he writes.
For the 1HFY2021 ended June, the group announced earnings of $296.1 million, which stood higher than his expectations for the FY2021.
However, the group has guided that the reduction in government grants during the period will be backloaded into the 2HFY2021.
See also: ST Engineering appoints Vertex chairman and chief defence scientist to its board
Commercial aviation recovery is also expected to be uneven, notes Ajith, even though the defence and public security revenue and earnings are estimated to be more resilient.
On this, he has raised his net profit estimate for the FY2021 by 2%, although he has also lowered his earnings estimate for the FY2022 by 4% at the same time. The lower estimate for the FY2022 is due to “slower growth from the commercial aviation segment”.
Meanwhile, analysts from DBS Group Research, OCBC Investment Research and RHB Group Research have kept “buy” on ST Engineering.
DBS analysts Suvro Sarkar and Jason Sum have given a higher target price estimate of $4.36 from $4.20 previously, with a raised FY2021 earnings estimate of 3% to factor in higher government grants, offset by lower cost savings.
The raised target price implies a total return potential of 11%, say Sarkar and Sum in an Aug 16 report.
“Our target price is based on a blended valuation framework which factors in both earnings’ growth and the long-term cash-generative nature of ST Engineering’s businesses,” they write.
While ST Engineering’s commercial aerospace business will take longer to recover, the analysts say they “expect strong growth momentum in its smart-city, satcom, cybersecurity and defence businesses to drive earnings recovery over the next few years”.
“ST Engineering estimates receipt of around $200 million in government grants in FY2021, $100 million more than earlier estimated, owing to additional grants outside Singapore. Thus, ST Engineering's earnings trajectory will likely not stray too far off FY2019 levels despite the impact of the pandemic,” they add.
According to Sarkar and Sum, they are more conservative in his earnings estimates for the FY2021 keeping in mind the slow recovery in the commercial aerospace maintenance, repair and overhaul (MRO) market.
The team at OCBC Investment Research has raised its fair value estimate to $4.40 from $4.30 as the group’s results came in “slightly better than expected”.
The higher fair value estimate comes as the group continues to win contracts, providing forward earnings visibility.
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RHB analyst Shekhar Jaiswal has kept his target price of $4.50, implying an upside of 10% and a yield of 4%.
In his report dated Aug 13, Jaiswal says he remains positive on ST Engineering based on his expectations of a continual improvement in its commercial aerospace business, supported by higher MRO work and passenger-to-freighter (P2F) conversions.
“Strong order wins momentum should continue amid improving global macroeconomic environment. Additional support from the government and ongoing cost rationalisation exercise should ensure ST Engineering’s resilient business emerges stronger from the pandemic,” he writes.
Shares in ST Engineering closed 6 cents lower or 1.5% down at $4.03 on Aug 16, implying an FY2021 P/B ratio of 5.4 times and a dividend yield of 3.7%, according to RHB’s estimates.
Photo: Albert Chua/The Edge Singapore
