SINGAPORE (Sept 6): RHB Research is initiating coverage on ST Engineering with a “buy” call and a target price of $4.07, on the back of a record-high orderbook.
“ST Engineering’s outstanding highest-ever orderbook of $13.5 billion provides revenue visibility for 2017 and 2018,” says analyst Shekhar Jaiswal in a report on Wednesday. “Its exposure to the commercial and defence industries across four segments creates a defensive business model that is tough to beat.”
In the first half of 2017, ST Engineering has already announced some $2.7 billion worth of order wins. Jaiswal believes the group could achieve $5.5 billion in new orders this year, an improvement of 10% from $5 billion a year ago.
“We believe the long-term growth prospects for ST Engineering’s world-leading MRO (maintenance, repair and overhaul) business remain strong,” says Jaiswal. “We also view positively its exposure to rapidly growing passenger-to-freighter (P2F) conversion business.”
According to Jaiswal, ST Engineering’s MRO growth will be supported by aircraft fleets in China and India, which are expected to expand by more than 10% over the next 10 years.
In addition, the average of aircraft fleets in these two markets are also expected to increase. “This implies greater need for MRO checks,” he says.
On top of riding on the long-term growth of aircraft fleet, ST Engineering is also set to reap the fruits of Singapore’s Smart Nation initiative.
The city-state in May announced that some $2.4 billion worth of tenders will be called this year to invest in data analytics software and a communications backbone. And ST Engineering is looking to be “the backbone for this network,” Jaiswal says.
Already, it has acquired a 51% stake in SP Telecom, which owns an extensive network of fibre optic back-haul infrastructure and facilities, to boost its capabilities in delivering Smart Nation solutions.
This also places ST engineering in a good position to capture a piece of the pie in the global Smart City market, which has been estimated to grow to a whopping US$1.5 trillion ($2.0 trillion) by 2020.
“Supported by growth in the aerospace and electronics segments, plus land systems’ recovery, the group is set to deliver 10% earnings growth in 2018-2019,” Jaiswal says.
This bodes well for the group, which saw earnings fall 12% to $111.5 million in 2Q17, as it continues to be hampered by a weak marine sector.
See: ST Engineering 12% lower 2Q17 earnings of $111.5 mil, impacted by the weak marine sector
“With a dividend yield of 4%, it is as among the few strong dividend-paying blue-chip counters on the SGX with expectations of earnings growth,” Jaiswal says.
According to Jaiswal, the target price of $4.07 implies a FY2018F P/E of 23.3x. “We believe the premium valuation is justified, given prospects of earnings recovery and steady dividend yields,” he adds.
As at 11.14am, shares in ST Engineering are trading flat at $3.59. Year-to-date, its share price has climbed 11.1%.
