RHB’s Shekar Jasiwal has maintained his “buy” rating on Singapore Technologies Engineering (ST Engineering) with an unchanged target price of $3.90.
In an Oct 28 note, the analyst said ST Engineering’s share price returns have outperformed that of the Straits Times Index (STI), thanks to the defensive nature of its business – evident from two years of revenue visibility, relatively resilient 2020 earnings, and its ability to maintain dividend payments this year.
He believes ST Engineering’s plan to grow its passenger- to-freighter (P2F) business, and the potential smart city order wins should be a “long-term positive”.
“We remain optimistic on 2021F earnings growth, which we believe ST Engineering’s share price is yet to fully factor in.” he adds.
Jasiwal also pointed at the conversion of the passenger A321 jets to be able to carry cargo in their passenger compartments, with ST Engineering’s first A321 P2F converted aircraft entering service on 27 Oct.
He said before Covid-19, about 50% of air cargo carried worldwide flew in the belly of passenger jets. However, a sharp decline in passenger aviation traffic has squeezed air
freight capacity and airlines are now flying cargo on empty passenger jets, by fastening boxes to seats or stripping the passenger cabins.
With the full recovery in passenger aviation traffic expected to take over three years, and the high availability under-utilised aircraft, he expects the P2F business should see strong growth for next 2-3 years.
Earlier, RHB highlighted STE’s plans to increase its annual A321 P2F conversion capability from nine to 25 by 2023. In its 2018 investor day presentation, ST Engineering said it expects “steady state annual revenue” of more than $400 million from its P2F business by 2022.
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In addition, he said the Covid-19 pandemic may be positive for Smart City business and ST Engineering, which has a track record of more than 700 smart city projects in over 130 cities, could see strong order wins for its Smart City business in the next few years. ST Engineering could surpass the $2 billion of Smart City revenue target it expects to achieve by 2022.
Jasiwal elaborated that the pandemic has accelerated the need for digitalisation, and it is likely that globally, cities will witness an earlier-than-expected adoption of smart solutions.
Therefore, ongoing investments into - as well as the rolling out of - 5G telecom networks, and continuing investments into IT infrastructure and urbanisation of cities will provide a strong base for the adoption of smart city solutions.
Jasiwal concluded by saying that ST Engineering will likely maintain a distribution per share of 15 cents for FY2020, implying a healthy 4% yield – in contrast to other large-cap Singapore companies and banks, which should see lower dividends in 2020.
Its orderbook of $15.9 billion offers two years of revenue visibility, and he expects their 3Q order wins and business updates – expected to be announced next month.
As at 1.43pm, shares of ST Engineering traded at $3.63, with FY2020 price to book ratio of 5.1 and dividend yield of 4.1%.
