SINGAPORE (Apr 20): Despite unprecedented shocks to the global aviation industry, RHB Research has reiterated its “buy” call on top pick ST Engineering on the back of aggressive government support and its classification as an “essential service”.
“ST Engineering remains our Top Pick, given its relatively resilient and well-diversified business portfolio that offers strong revenue visibility from a record-high orderbook and earnings contributions from recently completed acquisitions,” said RHB analyst Shekhar Jaiswal.
The drop in global air traffic will negatively impact ST Engineering’s earnings. RHB has trimmed its 2020-2022 estimates 4-8% on a weak revenue outlook for aviation maintenance, repairs and operations (MRO) and lowered its target price to $4.65 from $4.90.
Nevertheless, ST Engineering’s diversified portfolio promises to cushion the impact of Covid-19 on the aviation industry. Besides aerospace technology, ST Engineering is also involved in electronics, land systems, marine and defence sectors, which can serve as alternative revenue streams for the duration of global travel restrictions. Senior management have also agreed to take a 5-10% pay-cut effective 1 May 2020 to reduce pressure on firm cash flows.
“Long-term growth drivers [for ST Engineering is] still intact,” commented an optimistic Jaiswal. “Gradual delivery of its record-high orderbook – which stands at $15.3 billion and offers more than two years of revenue visibility – along with moderated by positive earnings contributions from the acquisitions of Middle River Aerostructure Systems (MRAS), Newtec, and Glowlink, should continue to drive earnings growth over the forecasted period.”
ST Engineering’s crucial defence functions have also seen generous regulatory and financial support from the government. The firm’s aerospace, marine, automotive, and electronics, have been classified as essential services in both Singapore and the US, allowing it to continue operations as per normal for the foreseeable future. Government grants and business-supportive measures will help offset some near-term revenue weakness.
Strong order wins and returns from its MRAS and Newtec acquisitions could increase the value of the share. Investors should beware, however, of a sharper than expected slowdown of the aerospace industry, weak contribution from acquisitions as well as higher integration costs of ST Engineering’s Newtec integration. A delay in the implementation of the government’s Smart City initiative could also hurt the attractiveness of the stock.
As at 12.00pm, shares in ST Engineering closed at $3.40. This translates to a price-to-earning (P/E) ratio of 18.13 and a dividend yield of 4.46% according to Bloomberg valuations.
