CGS-CIMB Research analysts Lim Siew Khee and Kenneth Tan have kept their ‘add’ rating with an unchanged target price of $4.54 for Singapore Technologies Engineering (ST Engineering), citing stronger-than-expected orders and quicker resumption of global travel as rerating catalysts.
In a Nov 10 note, the analysts say the company recorded healthy 3Q21 order wins of $1.8 billion, a 7% increase y-o-y. This comprises $1.03 billion in Commercial Aerospace (CE), $413 million in Defence & Public Security and $382 million in Urban Solutions & Satellite Communications (USS).
The order wins in 3Q21 exclude contracts that are commercially sensitive, which the analysts estimate to be as high as $750 million.
See: ST Engineering secures more than $1.82 bil contracts in 3Q21; order book at $18.2 bil
ST Engineering’s order book reached a record high of $18.2 billion compared to $16.8 billion in 2Q21, with $1.9 billion expected to be recorded in 4Q21F, the analysts note. ST Engineering has achieved 80% of its $180 million in cost savings in FY21, as part of its efforts to offset the FY20 $250 million in grants.
Revenue from CE came in at $607 million, a 27% increase y-o-y in 3Q21 on the back of greater maintenance, repair and overhaul recovery from increasing international flights and strong demand for passenger-to-freighter (PTF) conversions.
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“On the PTF front, ST Engineering is fully booked for A320/A321 conversions through mid-2024 and has some bookings for A330 conversions through mid-2025, with 30 PTF inductions expected in 2021 and more than 55 PTF expected in 2022,” the analysts say.
In 3Q21, the division won 18 units of A320/A321 PTF contracts from aircraft lessor BBAM. The analysts highlight that the company intends to open a new PTF conversion facility in the US by end-FY21F and two new facilities by end-FY22F.
Meanwhile, the ongoing semiconductor chip shortage has impacted ST Engineering’s USS segment. The EBIT margin for USS could be under pressure in the near term, the analysts say, noting that the EBIT margin in 1H21 was 2%.
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“That said, we still expect healthy USS order wins given ST Engineering’s established incumbency in the industry. Notable USS projects won in 3Q21 include modernisation of Singapore’s rail communication systems and implementation of smart lift monitoring solutions for lifts in Singapore.”
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The analysts add that ST Engineering’s cold weather all-terrain vehicle prototype with Oshkosh Defence for the US Army has completed summer trials and is now going into winter trials, with more clarity expected by mid-2022.
As at 1.52pm, shares in ST Engineering are trading flat at $3.85.
Photo: Albert Chua / The Edge Singapore
