Analysts are upbeat on Singapore Technologies Engineering (ST Engineering) as US domestic airline travel recovers back to pre-Covid-19 levels.
To that end, CGS-CIMB Research and UOB Kay Hian have kept their respective “add” and “buy” calls while also raising target prices. CGS-CIMB now has a target price of $4.41 from $4.00 previously, while UOB Kay Hian has a target price of $4.26 from $4.07 previously.
UOB Kay Hian analyst K Ajith cites data from air travel intelligence company OAG, pointing out that US airlines seat capacity as at June 28 was only 10% lower than pre-pandemic levels. He expects this to grow further as the US had eased travel warnings to 110 countries on June 1, which should boost international capacity.
Given ST Engineering’s aircraft maintenance presence in the US, Ajith sees this as a positive sign. “This should benefit ST Engineering’s airframe maintenance business as well as their component and engine repair businesses,” he writes in a July 6 research note.
See also: ST Engineering's share price weakness presents buying opportunity: RHB
CGS-CIMB’s Lim Siew Khee supports this view, highlighting that the US Transportation Security Administration (TSA) expects summer travel volumes to rise, with passenger travel volumes at some popular destination airports already exceeding 2019 levels.
Besides rising maintenance and repair demand, Lim also highlights that ST Engineering’s aerospace division will benefit from the planned ramp-up in production by Airbus. In May, Airbus guided its global suppliers that it intends to increase A320 production to 45 units per month by 4Q2021 and 64 units per month by 2Q2023. In her view, this bodes well for ST Engineering, which supplies engine nacelle and floor paneling via its subsidiaries.
Correspondingly, Lim has raised her FY2021-FY2023 ending December earnings per share (EPS) forecasts by 5-6% to reflect stronger revenue and margins for the aerospace division, underpinning her higher target price.
She is bullish that ST Engineering will gain stronger contract wins from 2Q2021 onwards as economies gradually reopen. “We expect ST Engineering’s order book to breach $16.5 billion by end-2021 on sustainably firm order momentum,” she says.
Meanwhile, Ajith believes that ST Engineering is also making progress on the electronics front, with a contract secured from AXESS Netwroks to provide hub systems in Mexicos, as well as a partnership with Intelstat to expand broadband services in the Philippines.
In addition, Ajith points to ST Engineering’s recent share buy backs and insider purchases as an indication of management’s growing optimism of recovery. “ST Engineering is likely to maintain dividend payout of 15 cents. At current price of $3.90, that translates into a yield of 3.85%,” he adds.
For more stories about where the money flows, click here for our Capital section
ST Engineering remains UOB Kay Hian’s sole “buy” in the Singapore aviation sector. “Given ST Engineering’s exposure to a recovery in the US aviation market, ST Engineering will register faster recovery than Asian airlines. We are also encouraged by the fact that orderbook is now higher than pre-pandemic levels,” Ajith says.
His high target prices follows an increase in his sustainable growth rate assumption from 13.1% to 13.2%.
As at 3.43pm, shares in ST Engineering are trading up 6 cents or 1.54% higher at $3.96.
Photo: Albert Chua/The Edge Singapore
