RHB Bank Singapore analyst Shekhar Jaiswal is maintaining his “buy” call on Singapore Technologies Engineering S63 (ST Engineering) at an unchanged target price of $4.45, citing no changes to his positive outlook for the company.
In his Nov 30 report, Jaiswal notes that although ST Engineering’s order wins moderated in 3QFY2023 ended Sept 30, the company’s 9MFY2023 order wins were up, and its strong outstanding orderbook offers close to three years of revenue visibility.
“With 19% profit compound annual growth rate (CAGR) during FY2022 to FY2025 and defensive yields, we believe ST Engineering should be part of every investor’s portfolio,” writes the analyst.
ST Engineering’s strong earnings growth outlook will continue to be supported by continued strength in its commercial aerospace (CA) segment from better maintenance, repair and overhaul (MRO) earnings as aviation traffic continues to recover, as well as better margins for its passenger-to-freighter (PTF) conversion business.
Meanwhile, the company’s urban solutions and satellite communications (USS) segment should similarly see improvement from a rightsizing exercise and earnings contribution from its TransCore acquisition.
Jaiswal adds: “The defence and public security (DPS) business should see earnings supported by the gradual delivery of the orderbook. For FY2022 to FY2025, we expect ST Engineering's CA, USS, and DPS segments to deliver 18%, 63%, and 8% earnings before interest and taxes (ebit) CAGR.”
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On its debt situation, ST Engineering continues to guide for a FY2023 borrowing cost of a low 3% and a FY2024 borrowing cost of mid-3%, which is in line with the analyst’s expectations assuming an incoming 25 basis points (bps) rate hike before the year-end.
“However, we note that there is an increasing possibility that we may already be close to peak interest rates in the US, and interest rate cuts are a likelihood in 2HFY2024. If the US Federal Reserve manages to engineer a soft landing, which is our base case scenario, and interest rates do start to decline in 2HFY2024, we believe there could be upside risks to our earnings in FY2025 based on lower borrowing costs,” writes Jaiswal.
The analyst maintains that ST Engineering's ability to produce “significant positive free cash flow” and the “opportunistic sales” of aircraft assets in 4QFY2023 could be used to pare down debt levels.
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Outlook
With a strong orderbook of $27.5 billion providing close to three years of revenue visibility, the company now pays 4 cents of dividends per share every quarter.
Given its strong earnings outlook, Jaiswal expects ST Engineering to be able to sustain its full-year dividend per share (DPS) of 16 cents.
Key drivers noted by the analyst include strong order wins and contributions from acquisitions, while key risks include the slower revival of the commercial aerospace sector, a lower-than-expected contribution from acquisitions and lastly a delay in the implementation of Singapore’s smart nation initiative.
As at 3.45 pm, units in ST Engineering are trading two cents lower or 0.54% down at $3.70
