RHB Bank Singapore's Shekhar Jaiswal continues to call ST Engineering S63 a "buy", citing the defence and engineering conglomerate's combination of defensive yield and strong earnings growth, which makes this a "special investment opportunity".
However, because of revised financing costs assumptions, which will therefore weigh down earnings forecast slightly by 2%, Jaiswal, in his May 9 note, has trimmed his target price from $4.10 to $4.05.
According to Jaiswal, ST Engineering will see potential upside from its commercial aerospace segment, on the back of a recovery in global aviation traffic.
Its urban solutions segment will see "strong growth" from Transcore, its US-based traffic management systems unit.
In addition, the defence segment will benefit from higher spending in Singapore and in the US.
Jaiswal acknowledges that investors are worried about the company's debt load, incurred to fund the acquisition of Transcore.
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Nonetheless, he believes the concerns should be allayed by the company's capacity to produce a significant free cash flow.
He expects a "gradual" drop in the company's gearing from the current FY2023 to FY2025.
"We think that Moody's recent reinforcement of its AAA issuer rating – the highest rating level offered by the credit rating agency – should allay investor worries about ST Engineering's elevated debt levels," writes Jaiswal.
As at 10.10am, ST Engineering shares changed hands at $3.66, up 0.27%.
