Jason Sum and Suvro Sarkar of DBS Group Research have raised their target price for Singapore Technologies Engineering S63 following its 3QFY2023 earnings, as they see the company "no longer just a defensive play, but also a compelling growth story".
Traditionally, ST Engineering has been seen as the "defensive stalwart" giving a steady yield but limited growth.
In their Nov 14 note, the DBS analysts point out that ST Engineering, since 2018, has transformed this "narrative", as it undertook its largest acquisition to date of TransCore to diversify and enhance its own organic investments into future growth areas.
"These proactive steps position ST Engineering to achieve mid-single-digit revenue growth over the long haul, in our view," Sum and Sarkar state, as they kept their "buy" call and raise their target price from $4.20 to $4.50.
"While ST Engineering’s share price has been trending sideways for some time, we believe it is on the cusp of a breakout as the company shifts back into growth mode starting from FY2024," the analysts say, referring to impending earnings growth of between 15 and 20% for the coming year, versus just 3-5% seen for the current FY2023.
A potential increase in its dividends - which is now at four cents per quarter - could also catalyse a re-rating, they add.
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Most of the other analysts, while similarly upbeat on ST Engineering, have maintained their target prices following the 3QFY2023 numbers, where earnings increased by
As of end of 3QFY2023, the company has built up an order book of $27.5 billion, just a tad lower than the record of $27.7 billion as at end of 2QFY2023, which provides for three years of revenue visibility.
In 3QFY2023, the company won $2.2 billion in new orders, versus between $4.7 billion and $4.9 billion each in the two preceding quarters.
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"Management noted that quarterly new contract wins ebb and flow, but the underlying demand trajectory has remained very healthy," states UOB Kay Hian's Roy Chen in his Nov 14 note. Chen's "buy" call and unchanged target price of $4.20 is pegged to discounted cash flow valuation.
Shekhar Jaiswal of RHB Bank Singapore, who has a "buy" call and $4.45 target price, believes that ST Engineering is set to enjoy further upside for its commercial aerospace business, as the recovery of international travel in Asia-Pacific trails the other major markets.
"The addition of new hangar capacity in China, the USA, and Singapore over the next few years will help in taking on more order deliveries," he adds.
Peggy Mak of PhillipCapital, on her part, is eyeing growth in another business segment to support her “buy” call and $4.50 target price.
“Heightened geopolitical tensions will drive an increase in spending and stockpiling of defence and cybersecurity products and services, thus driving STE’s order wins going forward,” says Mak in her Nov 14 note.
There is one blemish, however, with ST Engineering guiding that its urban solutions and satcom division will see a weaker ebit this FY2023, due to delayed customer spending.
Lim Siew Khee of CGS-CIMB is unfazed, as she expects this division to rebound in the coming FY2024 thanks to ramp-up of major projects, and optimised costs over at the satellite operations.
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Lim has reiterated her "add" call and $4.27 target price on strong earnings growth seen over FY2023 to FY2025.
Kelvin Tan of Maybank Securities is confident ST Engineering can maintain its dividend payout, which now stands at 4 cents per quarter, thanks to its robust cash flow and resilient business portfolio. He has kept his "buy" call and $4.20 target price.
Tan, in his Nov 10 note, expects the company's total borrowings to reduce from $6.2 billion as at Sept to mid-$5 billion by end of this December on strong operating cash flows, which helps maintain a weighted average borrowing cost at just 3%.
