SINGAPORE (Mar 23): Analysts are staying optimistic on ST Engineering after the group at its inaugural Investor Day on Thursday outlined plans to fuel future growth over the next five years.
“Ambitious targets were set for revenues and profits with a 2022 timeline,” says DBS Group Research’s lead analyst Suvro Sarkar in a flash note on Friday.
DBS is keeping its “buy” call on ST Engineering with a higher target price of $4.10, from $3.90 previously.
For instance, ST Engineering revealed – for the first time – that it had raked in $1 billion in revenue from its smart city business in FY17. And adds that it plans to double that to $2 billion by 2022.
“We like the increased clarity on smart city projects’ contribution to the topline and the communication of growth projections for that business line,” Sarkar says.
While ambitious, CIMB Research’s analyst Lim Siew Khee believes the target is “achievable”.
Lim notes that ST Engineering’s smart city-related revenue mainly led by its electronics division, which has clinched close to $2 billion per annum in orders since 2014.
“The growing awareness of smart city solutions and cyber security could scale up this unit's annual win to close $3 billion per annum in the next 3 years,” Lim says in a flash note on Thursday.
CIMB is keeping its “add” rating on ST Engineering with an unchanged target price of $3.80.
See: ST Engineering trials first-gen smart bus stop at Orchard Road
Meanwhile, ST Engineering expects revenue from its marine division to recover to 2013-2014 levels in the next five years. Revenue is projected to double to close to $1.3 billion in 2022, from $638 million in FY17.
“[ST Engineering] guided for smart city and marine revenue to double over the next five years,” says UOB Kay Hian analyst K Ajith in a report on Friday. “The rest of the businesses are expected to grow 2-3x faster than global GDP growth over the next five years.”
UOB is upgrading ST Engineering to “buy” and raising its target price to $4.10, from $3.60 previously.
ST Engineering is looking to its aerospace division’s passenger-to-freighter (P2F) conversion programmes to contribute steady-state revenue of over $400 million per annum by 2022, up from an estimate revenue of about $200-300 million currently.
ST Aerospace also plans to expand its leasing fleet to an expected 50 aircraft by 2022, up from the current five aircraft.
On the defence front, ST Engineering estimates its addressable market for defence export to worth $7 billion globally.
“The US and the Middle East were cited as key opportunities for defence exports. The US is already the largest defence market, with steady growth, while the Middle East is expected to grow at close to 9% per annum going forward,” says Sarkar.
According to Lim, the largest near-term contract on the horizon is for the final award of an amphibious combat vehicle for the US Marine Corp in June-July, valued at more than $1.3 billion.
This will be followed by the award of the prototype for Mobile Protected Firepower for the US Army, to be announced by 2H18, Lim adds.
“We believe that [ST Engineering’s] optimism is due to recent contract wins and global expansion plans. If such overseas contract wins materialise, then [ST Engineering] could morph into a growth stock,” Ajith says.
See: ST Engineering says FY17 earnings up 5.6% to $511.9 mil on higher sales
Based on guidance, the analysts project the group’s revenue and net profit to grow at a targeted compound annual growth rate (CAGR) of between 7% and 11%.
As at 3.29pm, shares of ST Engineering are trading 1 cent up at $3.48. According to UOB valuations, this implies a price-to-earnings ratio of 20.9 times, a price-to-book ratio of 4.7 times, and a dividend yield of 4.3% for FY18.
