RHB Bank Singapore analyst Shekhar Jaiswal is keeping “buy” on Singapore Technologies Engineering S63 (ST Engineering) with an unchanged target price of $4.45, as he sees that the group’s share price outperformance is set to continue.
“The [around] 4% decline in the group’s share price over the last five days is not indicative of any change in its fundamental earnings outlook,” writes Jaiswal in his Oct 23 report.
The analyst’s target price includes a 6% environmental, social and governance (ESG) premium over the fair value of $4.20.
Jaiswal points out: “ST Engineering continues to offer earnings growth and dividend stability, rare attributes in the current uncertain macroeconomic environment.”
In his report dated Oct 23, the analyst understands that the group should deliver a 19% profit compound annual growth rate (CAGR) during FY2022 to FY2025, due to strong earnings growth by ST Engineering’s commercial aerospace (CA) and urban solutions and Satcom (USS) segments.
“Investors can look forward to receiving four cents of dividends every quarter,” notes Jaiswal.
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On the group’s marine business, an 18-month service support contract was signed to provide naval maintenance, repair, and overhaul (MRO) for two patrol vessels (PV) that currently belong to the Royal Brunei Navy, and ST Engineering will also deploy a team of specialist engineers in Brunei to support the build-up of a maintenance regime for the PV.
An option to be called upon to provide on-site technical support and resources as well as engineering solutions for obsolescence and modernisation needs is also open.
Beyond this, the group has also won a contract to design, build, and maintain Abu Dhabi's first multimodal Intelligent Transportation Central Platform (ITCP) over three and a half years until 2027. As the consortium lead, ST Engineering will design and build the ITCP in addition to being responsible for system integration and overall project management.
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Meanwhile, Jaiswal observed that the group’s order book stands at an all-time high of $27.7 billion, which will provide close to three years of revenue visibility.
He writes: “Despite its elevated debt profile, ST Engineering’s ability to produce significant free cash flow will allow it to not only reduce its debt position gradually but also sustain its full-year dividend per share of 16 cents.”
While the RHB analyst expects interest rates to remain elevated in the near term, he notes that the group is guiding for FY2023 and FY2024 borrowing costs of low 3% and mid 3% respectively.
On ST Engineering’s forecast, Jaiswal writes that the group’s strong earnings growth could be supported by a recovery in global aviation traffic which will boost its CA segment, while contributions from the TransCore acquisition and the recently completed rightsizing exercise could support growth for its USS segment.
A further contributing factor in the group’s growth could also be the group’s defence and public security (DPS) segment earnings, as its orderbook is delivered.
Conversely, key risks included by him include the slower revival in the group’s CA sector, a lower-than-expected contribution from acquisitions and a delay in the implementation of Singapore’s smart nation initiative.
“During 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,” writes Jaiswal.
As at 4.15pm, shares in ST Engineering are trading one cent lower or 0.27% down at $3.76.
