OCBC Securities has maintained its "buy" call on ST Engineering but with a raised fair value of $4.45 from $4.20.
In its Sept 15 note, OCBC notes that the defence and engineering firm's 21% gain year to date has outperformed the broader Straits Times Index by 16%.
This follows "healthy operating trends" reported by the company for its 1HFY2023 ended June. "We are encouraged by management’s efforts to mitigate risk factors, including cost rationalisation on underperforming assets, capital recycling to manage gearing levels, also driving operational leverage and margin improvement in core businesses."
OCBC notes that ST Engineering's revenue for 1HFY2023 has already surpassed what it generated before the pre-pandemic and that further growth can be expected, including from its commercial aerospace segment, which, in turn is seeing stronger demand with the resumption of China’s outbound tourism.
OCBC notes that ST Engineering’s urban solutions and satcom divisions had delivered another weak half of performance when it reported earnings for 1HFY2023.
However, the outlook is improving with management guiding for this year’s operating profit to be similar to last year’s, implying a significant turnaround in the current 2HFY2023.
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According to OCBC, potential drivers for the turnaround include an improvement in supply chain disruptions by the end of the year; more deliveries for various projects in 2H23 and the restructuring of Satcom segment resulting in cost savings.
Meanwhile, the company, as a whole, continues to win new contracts. In the latest 2QFY2023, ST Engineering added $4.7 billion worth of orders, bringing the total orderbook to a record S$27.7 billion. Of this order book figure, about $4.4 billion is expected to be delivered in the remaining months of 2023.
ST Engineering is thus far keeping to its dividend policy of paying 4 cents per share every quarter, says OCBC.
