RHB Group Research analyst Shekhar Jaiswal has kept a “buy” rating on Singapore Technologies Engineering (ST Engineering) with a lowered target price of $4.10 from $4.60.
Upon visiting ST Engineering’s Paya Lebar and Seletar facilities, Jaiswal is positive about the business outlook for maintenance and repair overhaul (MRO) and passenger-to-freighter (P2F) areas.
At a global stage, there are currently 120-140 P2F conversions being undertaken, with ST Engineering ramping up its capacity to account for about a third of these annual global conversions. Jaiswal observes that wide body hangars at Paya Lebar were busy with B767 P2F conversions and that ST Engineering can complete six wide body P2F conversions annually at its Paya Lebar facility. In addition, the narrow body hangars at Seletar were occupied with A320 P2F conversions and ST Engineering can complete 12 narrow body P2F conversions annually at its Seletar facility.
Due to macroeconomic turbulence at large, Jaiswal expects some moderation in P2F business in the near term, particularly in the areas of skilled labour availability and labour and materials inflation. “While the situation seems to be improving, there are still challenges on the labour, raw materials, and supply chain front,” he says.
At present, ST Engineering is experiencing a labour shortage of approximately 10% as compared to what is needed and a labour cost inflation of high-single to double digits. “With respect to contract price readjustment in response to rising costs, ST Engineering noted that it has an option for price escalations in older contracts,” writes the analyst. “However, airlines have historically preferred a fixed price escalation and for contracts that have variable price escalation, the escalations tend to be capped.”
At the same time, the analyst believes that as at 1HFY2022 ended June about half of ST Engineering’s debt will be exposed to rising interest rates. “With an additional US$700 million ($1 billion) of debt to be brought onboard to fund the Transcore acquisition, we see a likelihood of higher interest expenses for ST Engineering from FY2023,” he writes.
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Jaiswal has increased the adjusted annual interest rate for ST Engineering’s debt to 2.75% from 2023, from his current estimate of 2.4%
Nevertheless, the analyst expects ST Engineering’s strong orderbook to support earnings growth beyond FY2022 and estimates its FY2023-FY2024 profit growth at 13%-14% given a record-high orderbook, growing defence revenue, and Urban Solutions and Satcom Security’s potentially sharp recovery.
ST Engineering reported its highest order backlog of $22.2 billion, which implies a book-to-bill ratio of 2.7 years and $4.6 billion of this orderbook is expected to be delivered in 2HFY2022, representing 100% of Jaiswal’s 2HFY2022 revenue estimates.
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“We also expect ST Engineering to see higher interest expenses from FY2023 amidst rising rates. We lower FY2022-FY2024 earnings by 3%-4%, yet remain confident of its defensive business,” Jaiswal adds.
As at 12.04pm, shares in ST Engineering are trading at 2 cents up or 0.60% higher at $3.37 at a FY2022 P/B ratio of 4.4x and dividend yield of 5.2%.
