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'Buy' ST Engineering for its defensive business amid Covid-19: analysts

Felicia Tan
Felicia Tan • 4 min read
'Buy' ST Engineering for its defensive business amid Covid-19: analysts
CGS-CIMB, DBS and OCBC have also upped their target prices on ST Engineering to $4, $4.80 and $4.30 respectively.
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Analysts from CGS-CIMB, DBS Group Research and OCBC Investment are positive on Singapore Technologies Engineering (ST Engineering) after the group posted better-than-expected order wins for the 3QFY2020.


See: ST Engineering expects FY2020 revenue to be 'close to midpoint' of 5% to 15% lower than year before in business update and ST Engineering unveils new organisational structure

On Nov 18, ST Engineering posted order wins worth $1.7 billion in the 3QFY2020, with some $15.8 billion worth of order backlogs as at end September, which exceeded the group’s pre-Covid-19 average of $1.6 billion in 2018-2019.

Management reaffirmed that its margins were not compromised by the strong order intake.

The group also announced its intention to reorganise itself into two main units to better execute its global growth strategy of strengthening its core businesses, and pursuing growth in businesses in smart city and international defence, the day before.

On that, CGS-CIMB analyst Lim Siew Khee has maintained “add” on the group and upped its target price to $4 from $3.76 previously due to its diversified business even within the Aerospace business sector and reorganisation as it could mean “leaner structure and better operating leverage” for the group.

“We roll forward our target price to calendar year 2022F, still based on blended valuations (DCF, 19x CY22 P/E and 4% yield). Rerating catalysts: stronger defence orders,” she says.

Lim has, however, trimmed her earnings per share (EPS) estimates for FY2021F-2022F by 1% on lower aero margins assuming that there’s a learning curve for passenger-to-freighter (PTF) on new aircraft induction.

DBS analysts Suvro Sarkar and Jason Sum have also reiterated their “buy” call on ST Engineering, as they deem the group a “safe haven pick”.

Sarkar and Sum have also upped their target price to $4.80 from $3.80 previously to factor in earnings upgrade for FY2021, as well as higher valuation pegs in line with promising development on the Covid-19 vaccine front.

“The 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 say.

ST Engineering’s reported order wins for the quarter came in above the analysts’ expectations, while they see the government’s Jobs Support Scheme (JSS) grants will aid earnings resilience for the FY2020. To this end, the analysts have raised their earnings projections for FY2021F by 8%.

Sarkar and Sum also see ST Engineering’s high certainty of a 4% dividend yield providing support. The group’s balance sheet remains healthy with positive operating cash flows for the 1HFY2020, which boosts confidence in a steady annual dividend pay-out of 15 cents per share, they say.

Similarly, the team at OCBC Investment Research (OIR) have maintained their “buy” recommendation with a higher fair value estimate of $4.30 from $3.90.

Since the team’s previous report, they note that ST Engineering has outperformed the broader market with a 16% appreciation in its share price compared to the 7% growth in the Straits Times Index (STI).

The stock has also been a beneficiary on the recent developments pertaining to the Covid-19 vaccine.

“The group’s aerospace segment, for instance, should see some light after the Covid-19 outbreak put immense pressure on the global aviation industry’s profitability and cashflows,” says the team.

“Looking ahead, ST Engineering is well positioned to benefit from areas like PTF conversion (increased demand for cargo transport) and smart city solutions, including safe access control management,” adds the team, who have identified potential catalysts such as recovery in the aerospace segment better-than-expected margins and significant growth in contract wins in its electronic sector.

Downside risks, according to the team, include a decline in oil prices, lower-than-expected margins, integration hiccups following its acquisitions and longer-than-expected recovery in the aerospace sector.

As at 3.41pm, shares in ST Engineering are trading at 9 cents higher or 2.3% up at $3.93.

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