SINGAPORE (Jan 13): Following a solid 2019, ST Engineering appears poised to continue its good run this year.
According to Shekhar Jaiswal, an analyst at RHB Group Research, ST Engineering could deliver double-digit profit growth in 2020-2021, on the back of its record high orderbook and earnings-accretive acquisitions.
ST Engineering is the brokerage’s top pick in Singapore as well as in the capital goods sector.
Zeroing in on the group’s outstanding orderbook of $15.9 billion as at end-2019, Jaiswal notes that this provides the group with revenue visibility of some 2.5 years. In addition, the group has also outperformed its previous year’s figures in terms of order wins.
“Excluding the $1 billion contract for the design and construction of the first Polar Security Cutter, the company reported order wins worth $5.4 billion in 9M19. This has already exceeded the reported order wins worth $5.2 billion in 2018,” says Jaiswal in a Jan 13 report.
Apart from its orderbook, ST Engineering’s recent acquisitions are set to drive its near-term earnings growth. The way Jaiswal sees it, profit growth has been strong for the group on the back of contributions from its recent acquisition of Middle River Aerostructure Systems (MRAS), a US-based original equipment manufacturer engine nacelle manufacturer in April.
“We expect this profit contribution to increase, in line with the ramp-up in output at MRAS,” shares Jaiswal.
“We maintain that the recently completed Newtec and Glowlink acquisitions should remain earnings accretive despite the $20 million in integration costs that will be spread over 4Q19 and 2020,” he adds.
The brokerage is also expecting ST Engineering’s share price to outperform the Straits Times Index, with the group’s strong free cash flow (FCF) generation capability translating into its ability to deliver high dividend yields.
Although optimistic on the outlook for ST Engineering, Jaiswal identifies certain areas of caution for investors which could pose stumbling blocks for the group.
These include the group’s inability to sustain its current rate of strong order wins, a slowdown in its aerospace business, a hike in MRAS and Newtec integration costs as well as lower-than-estimated contributions from recently completed acquisitions.
RHB Research is keeping its “buy” call on ST Engineering with an unchanged target price of $4.55, representing a potential upside of 12%.
As at 12.18pm, shares in ST Engineering are trading two cents lower, or 0.5% down, at $4.04. This translates into a price-to-book ratio of 5.3 times and a dividend yield of 3.7% for FY20F according to RHB valuations.
