SINGAPORE (Aug 10): RHB is maintaining its “buy” recommendation on ST Engineering with a lowered target price of $3.97.
This came on the back of the group announcing that its 2Q18 earnings have increased by 10% to $117.5 million compared to $106.8 million in 2Q17, largely attributable to higher profitability from the Aerospace and Electronics sectors.
This brings 1H18 earnings to 235.2 million, 14% higher than $206.7 million in 1H17. This was slightly below the research house’s expectations amid lower-than-estimated profit from the group’s Land Systems segment.
See: ST Engineering reports 10% rise in 2Q earnings to $117.5 mil
Revenue for the quarter came in at $1.65 billion, 3% lower than $1.71 billion last year.
The Aerospace sector’s 26% y-o-y profit growth was aided by higher shop visits witnessed by the engine repair & overhaul business, sale of two engines, and $9 million gain from an associate sale. And the sector reported new order wins worth $510 million during the quarter.
See: ST Engineering Aerospace bags $510 million worth of new contracts in 2Q
In a Friday report, analyst Shekhar Jaiswal says, “A330 passenger-to-freighter (P2F) deliveries are set to drive near-term growth.”
Meanwhile, the group’s Electronics sector, which saw a 22% y-o-y profit growth in 2Q18, was aided by higher profit margins across all business segments.
The Electronics sector reported $764 million in new order wins during the period, including rail electronics solutions (Taipei, Wuhan, and Singapore), Internet of Things-enabled smart street lights pilot (Hong Kong), integrated public safety & security, and cyber security solutions for commercial and defence customers, as well as contracts to supply satellite communication products and Cloud solutions.
“Near-term growth should depend on delivery of smart mobility, satellite communications, and software systems-related contracts, which as per STE, are all on schedule,” says Jaiswal.
In 2Q18, the Land Systems sector secured new contracts: weapons & munitions supplies from customers in Asia-Pacific and Europe, and road construction equipment and specialty vehicles from clients in North & Latin America and Asia.
The group also commenced on-road testing of on-demand autonomous shuttles in Singapore.
The Marine sector saw a 9% y-o-y drop in revenue to $148 million.
“We expect Marine to sustain this improvement in earnings as it delivers a sixth Littoral Mission Vessel to the Singapore Navy and LNG-powered container RO-RO vessels in 2H18,” adds Jaiswal.
In addition, the group has declared an interim dividend of 5 cents and should pay 15 cents in dividends for 2018. This implies a 4.3% yield.
The analyst believes that the group’s strong orderbook and continuing order wins will support earnings growth and drive a re-rating for the stock.
As at 3.22pm, shares in ST Engineering are trading at 7 cents lower at $3.38 or 4.7 times FY18 book with a dividend yield of 4.3%.
