Analysts have maintained their positive views on Singapore Technologies Engineering’s (ST Engineering) S63 , given improving results across its various key businesses, and how its order book, at a record of $27.7 billion, will give plenty of earnings visibility ahead.
On Aug 11, the group announced that earnings for its 1HFY2023 was $280.6 million, up 0.2% y-o-y. Earnings per share (EPS) was up similarly by 0.2% y-o-y to 9.01 cents.
Revenue in the same six month ended June was up 13.9% y-o-y to $4.86 billion, with higher contributions across its three business segments.
Meanwhile, gross profit saw a significant rise of 15.5% y-o-y to $980.4 million, whilst group ebitda rose 16% y-o-y to $711 million.
See more: ST Engineering reports 1HFY2023 earnings of $280.6 mil, up 0.2% y-o-y
Following the healthy set of results, Citi Research has upgraded its call to “neutral” from “sell" previously, whilst DBS Group Research, Maybank Securities, UOB Kay Hian, RHB Bank and CGS-CIMB Research have all kept their “buy” and "add" calls.
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Citi, Maybank, UOB, RHB and CGS-CIMB have also raised their target prices, whilst DBS has kept its target price of $4.20 unchanged.
Citi has raised its target price to $3.76 from $3.33, Maybank to $4.20 from $4.10 previously, UOB to $4.20 from $4.00 previously, RHB to $4.50 from $4.25 previously, and lastly CGS-CIMB to $4.27 from $4.00 previously.
Citi analyst Jame Osman says he is “encouraged” by ST Engineering’s efforts to manage costs incurred from running underperforming assets, capital recycling to reduce its gearing levels while driving operational leverage as well as margin improvement in the core businesses such as the defence and public security (DPS) segment, which is seen to benefit from the momentum of new order wins.
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Osman is also cheered by the improving commercial aerospace (CA) segment, which is riding on the recovery in air travel. For one, ST Engineering says it is on track to turn ebit positive on its passenger to freighter (PTF) business this year, while its engine/component MRO demand is showing signs of improvement.
Osman notes that while there are near-term worries such as labour shortages and supply chain bottlenecks, topline momentum “appears to finally have driven” underlying operational leverage.
ST Engineering has also continued to invest in significant hangar capacity in the US and China so that it can capture potential growth ahead. However, in doing so, it could result in some front-loading of expenses.
As for ST Engineering’s urban solutions and satcom sector (USS) business segment, the group highlighted that its 20% reduction in headcount of its satcom business portfolio should reduce costs by $30 million to $60 million over the next five years, although it also flagged that continued research and development (R&D) investments will be required to future-proof the business.
Ebit levels for the USS are comparable to FY2022, as its performance will be weighted to 2HFY2023 from projects including TransCore and its Kaohsiung rail contracts.
The group expects TransCore, which was acquired at a cost of US$2.7 billion in early 2022, to turn earnings accretive in its second year, along with more project deliveries.
“We think ST Engineering’s stronger topline momentum is finally beginning to drive better operational leverage in its core businesses,” says Osman.
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“However, we remain cautious on the near-term risk factors [which are] cost inflation and inflation,” opines the analyst, who has raised his EPS estimates by 11%, 10% and 5% for the FY2023 to FY2025 mainly on expectations for ST Engineering’s margins to grow in a more sustainable manner.
Meanwhile, Maybank Securities analyst Kelvin Tan believes that ST Engineering, with earnings seen to grow at a CAGR of 14% between FY2022 to FY2024, “remains a good investment”, given its undemanding valuation now.
Supportive factors includes the recovery of the CA segment, which is seen to deliver 14% ebit CAGR. Next, contribution from TransCore, plus annual cash savings from streamlining and restructuring in USS, will help lift this segment’s ebit by a 64% CAGR. In addition, the DPS segment will benefit from rising defence spending in Singapore, says Tan, who expects this division to enjoy 7% CAGR for FY2023 to FY2025.
Tan believes upside catalysts might come from higher-than-expected PTF work from airlines upgrading their passenger fleets with supported cargo growth, and better-than-expected margins if aircraft original equipment manufacturers (OEM) slow down their aftermarket expansion due to full order books.
Further upside can be expected if ST Engineering wins more orders from US defence and infrastructure projects, an area that ST Engineering has been pursuing but where large contracts have been few.
On the other hand, downside risks include the ongoing rise in inflation which could make aircraft materials and equipment more expensive, as well as growing competition from aircraft makers themselves namely Boeing and Airbus in the aftermarket-MRO space.
UOB analyst Roy Chen notes that last year’s 1HFY2022 profit was significantly helped by one-offs, whereas the 1HFY2023 result was driven by core performance.
The analyst also points out that ST Engineering’s guided orderbook of $4.4 billion expected to be delivered in 2HFY2023 is “slightly lower” compared with the $4.6 billion guidance “given a year ago” for 2HFY22.
Chen includes negative margin surprises due to project cost overrun and inflationary cost pressure as key risks.
RHB analyst Shekhar Jaiswal is concerned with financing costs to be incurred by ST Engineering. He notes that ST Engineering issued a US$500 million ($677 million) three-year fixed-rate bond in May at a yield of 3.3%.
“It is guiding for a FY2023 borrowing cost of low 3% and a FY2024 borrowing cost of mid-3%. While ST Engineering expects the total borrowings to drop to mid-$5 billion in December from $6.2 billion in June, based on our forecasts, we found it difficult to build it in,” says Jaiswal, who nonetheless, expects debt to to gradually decline in FY2023 to FY2025.
Meanwhile, key drivers cited by the analyst include strong order wins and contributions from acquisitions, whilst key risks include a lower revival in the CA sector, lower than expected contribution from acquisitions and lastly a delay in the implementation of Singapore’s smart nation initiative.
For CGS-CIMB analyst Lim Siew Khee, there was a bright spot in the 1HFY2023 results in the form of $300 million in ebit booked by the DPS segment.
She also noted how the USS segment continues to harvest from the acquisition of Transcore, as its 1HFY2023 revenue rose 27% y-o-y to $741 million.
“The execution of the US $500 million ($677 million) New York Congestion Pricing project in 2HFY2023, streamlining of Satcoms, as well as easing of supply chain pressures should result in a significantly stronger 2HFY2023 for the USS segment,” says Lim.
Lastly, DBS analysts Survo Sarkar and Jason Sum like STE for its long-term prospects.
“The big story is that instead of revenue stagnation seen historically, growth momentum will continue even beyond that, built on the solid foundation established over the last few years, driving robust mid-single digit organic growth across segments even out to FY2026,” the analysts note.
Sarkar and Sum include the group’s exposure to global slowdown as a key downside risk: “Deeper than expected recession scenario in the developed economies of the west could dent earnings outlook, as STE derives a significant amount of revenue from the US at 23% and Europe at 20%.
ST Engineering closed at $3.85 on Aug 14, up 1.85% for the day.
