Analysts are remaining positive on Singapore Technologies Engineering (ST Engineering) S63 as a recovery play despite the company's slip in 2HFY2022 earnings, which came in 7.1% lower y-o-y at $255.0 million for the period ended December 2022.
DBS Group Research has maintained its “buy” recommendation for ST Engineering with an increased target price of $4.20 from $4.10 previously and CGS-CIMB Research has maintained its “add” rating for the stock with an unchanged target price of $4.00.
Meanwhile, OCBC Investment Research, Maybank Securities and RHB Group Research have each maintained their “buy” calls for ST Engineering with lower target prices of $4.20, $4.10 and $4.10 respectively, from $4.50, $4.30 and $4.15 previously.
For Suvro Sarkar and Jason Sum of DBS, although ST Engineering’s 2HFY2022 and full-year FY2022 earnings came in below expectations, this was due to high energy costs dragging the company’s margins. They maintain that ST Engineering remains “well on top” of crucial global needs of digitalisation, urbanisation, sustainability and security, and foresee revenue continuing to climb for the company.
With continued investments in research and development (R&D) and strategic acquisitions, they believe the company’s key focus will be on the strong ramp-up in Airbus Passenger to Freighter (P2F) conversions, continued traction in the smart city space, such as smart mobility, smart environment and smart security, the expansion in digital businesses including cloud, artificial intelligence (AI) analytics and cybersecurity, and international defence contract wins.
“Despite the drag to earnings from higher interest expenses, we expect double digit compound annual growth rate (CAGR) in earnings over FY2022 to FY2024, driven by inorganic growth from TransCore and the recovery in the commercial aerospace segment,” say the analysts.
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“However, the big story is that instead of revenue stagnation seen historically, growth momentum will continue even beyond that, building on the solid foundation established over the last few years, driving robust mid-single digit organic growth across segments even out to 2026,” they add.
On top of this, ST Engineering’s order book stands at a record level of $23 billion as at end FY2022, as new order wins of $13.1 billion in FY2022 surpassed expectations, which implies a robust book-to-bill ratio of around 2.5x and should underpin earnings visibility.
The DBS analysts believe ST Engineering’s share price has already factored in the negatives, and that the market is ignoring the company’s record order book levels and potential double-digit earnings growth over FY2022 to FY2024 at current valuations which stand around 1.5 standard deviations (s.d.) below its historical mean.
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Their target price of $4.20 which has been increased slightly from $4.10 is based on a blended valuation framework as they roll over their valuations to FY2023 estimates.
For Lim Siew Khee and Kenneth Tan of CGS-CIMB, ST Engineering’s urban solutions and satcom (USS) earnings were a positive surprise in 2HFY2022, coming in at 4% growth compared to the loss of 1.6% posted in the first half of the financial year.
This was despite a $20 million integration charge and shortage in high-chips impacting its satcom business. According to the analysts, the strength shown in this segment can be attributed to the six-month contribution from Transcore and delivery of rail mobility projects.
“While the chip shortage situation is improving, ST Engineering expects shortages to persist through 2023 and is working closely with customers on product development concerns. ST Engineering has also shut down its autonomous bus unit as of end-2022 given the unfeasible levels of investments required moving forward,” say Lim and Tan, who note that the company estimates the unit would require some $150 million over the next five to seven years.
“We think earnings accretion in 2HFY2023 for Transcore is a major milestone for ST Engineering, a testament to optimising its balance sheet for growth. Assuming the shortage of chips situation eases in the next one to two years, we believe USS’s ebit margin could potentially reach around 9% from our current FY2023 forecast of 6.6%,” they add.
The CGS-CIMB analysts see the stock as a recovery pick, which is trading at a 16x 2024 price-to-earnings ratio (P/E), 2 s.d. below its historical mean, and have kept their blended valuation-derived target price of $4.00 unchanged.
However, Kelvin Tan of Maybank sees potential for a weaker USS performance in FY2023 due to ongoing Transcore transport and installation costs, which was previously guided at an estimated $20 million to $30 million per annum for two to three years from FY2022. ST Engineering’s satcom sub-segment may also take time to recover from higher cost of equipment due to longer lead time for purchases and negative impact from global chip shortage, he says.
More positively, Tan sees ST Engineering as well placed to capture the surge in regional maintenance, repair and operations (MRO) work on the back of China’s reopening as airlines ramp up capacity and international flights gain traction.
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“We see a bigger impact in 2HFY2023 as airlines raise flight capacity back to pre-Covid levels. The PTF business should see steady execution of orders built up and smoother capacity expansion ramp-up. The PTF business would also be benefitted via improved labour and material supplies supporting better conversion turnaround times,” he says.
The Maybank analyst has cut his FY2023 to FY2025 earnings per share (EPS) forecasts by 2% to 3% on concerns over higher interest costs and weaker USS growth, offset by more growth in MRO volume on the back of China’s reopening, which has seen his previous target price of $4.30 correspondingly reduced by 5% to $4.10.
Meanwhile, the OCBC Investment Research team notes that ST Engineering has paid out “consistent” dividends over the years with a recent increase to 16 cents for FY2022, higher than the 15 cents paid out the year prior. They have fine-tuned their estimates, which has seen ST Engineering’s fair value slip from $4.50 to $4.20, in their view.
According to RHB’s Shekhar Jaiswal, ST Engineering has displayed “strong growth with steady dividends”. Although the company has adjusted its profit guidance by 7% to 9% for FY2023 to FY2024 to account for higher expenses and interest costs, he expects to see 17% to 19% profit growth from FY2023 to FY2025 with a steady 16 cent dividend payout. His slightly eased target price of $4.10 from $4.15 previously includes an 8% environmental, social and governance (ESG) premium over the $3.80 fair value of the stock.
As at 11.34am, shares in ST Engineering were trading 2 cents or 0.57% down at $3.52.
