PhilipCapital analyst Peggy Mak has initiated a “buy” call on Singapore Technologies Engineering S63 (ST Engineering) with a target price of $4.50. The analyst’s target price is based on a discounted cash flow model (DCF) valuation, and she expects a return on equity (ROE) and return on invested capital (ROIC) of 26.1% and 14.6% respectively in FY2024.
Amidst heightened geopolitical tensions and cybersecurity threats, Singapore has expanded its defence and security spending by 12% y-o-y in FY2021 and 17% in FY2022, which well exceeds the 4% average annual growth in the area from FY2010 to FY2020. In FY2023, this average annual growth is expected to rise to 6%, says Mak.
“As a key Singapore defence contractor, ST Engineering’s defence and public security (DPS) sector will enjoy revenue visibility as more contracts are awarded,” she adds.
In 1HFY2023 ended June 30, ST Engineering won $5.2 billion in new orders for defence and security work, which is 20.9% higher than in FY2022.
On the company’s commercial aerospace (CA) sector, the recovery in air travel will underpin demand for aerospace maintenance, repair and overhaul (MRO) and components.
In 1HFY2023, total passenger-km rose 47.2% y-o-y, although the number is still 9.7% below its 1HFY2019 levels.
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Notably, the Asia-Pacific region is lagging behind other regions at 20.3%, due to it seeing the resumption of air travel last.
With air travel within Asia gaining pace from 2HFY2023, ST Engineering’s MRO bases in China, Vietnam and Singapore are poised to gain from the higher demand for MRO and components.
Meanwhile, Mak is optimistic about ST Engineering’s urban solution and satcom (USS) sector.
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“TransCore’s acquisition is on track to be earnings accretive from 2HFY2023, we believe, leading to positive FY2023 earnings before interest and taxes (EBIT) for the USS division,” she writes.
TransCore was acquired in March 2022 for $3.6 billion, at a goodwill of $2.3 billion.
Although it booked a net profit of $61.9 million from March to December 2022, this was offset by transaction and integration expenses of $30 million in FY2022 and $8 million in 1HFY2023, along with increased interest costs and goodwill amortisation.
Furthermore, TransCore received the notice-to-proceed for the New York Congestion Pricing project in June 2023, which is scheduled for completion by 2QFY2024.
The analyst notes: “We think this project could lead to more opportunities in other US cities. TransCore is on track to be earnings accretive from 2HFY2023 with contribution from this project and the fading of transaction and integration expenses.”
As at 3.45pm, shares in ST Engineering are trading at 2 cents higher or 0.52% up at $3.88.
