SINGAPORE (May 14): RHB Research is keeping its “buy” call on ST Engineering (STE) with an unchanged target price of $4.04 despite a 1Q18 that came in slightly below expectations.
STE saw a 17.8% rise in 1Q18 earnings to $117.7 million, as revenue rose 9% to $1.65 billion on higher contribution from the group’s Aeropace, Electronics and Land Systems sectors.
See: ST Engineering posts 17.8% higher 1Q earnings of $117.7 mil on higher sales
RHB had forecast net profit of $129 million for the quarter.
“This lower-than-expected performance was due to higher-than-expected operating costs and lower-than-estimated performance at the land systems operations,” says analyst Shekhar Jaiswal in a Monday report.
However, he believes STE remains on track to deliver strong growth in 2018.
“The continued push to secure more P2F conversion orders, smart city-related contracts in and outside of Singapore, higher defence exports, and increase in MRO capacity should drive STE’s earnings growth in the near term,” Jaiswal says.
On the Aerospace front, Jaiswal notes that STE is looking to secure launch customers for A320 passenger-to-freighter (P2F) conversion, grow its aircraft leasing fleet, and increase MRO capacity at its Pensacola facility in the US during 1H18.
At the same time, its Electronics business – the largest contributor to revenue and profit growth during 1Q18 – saw revenue growth across the board. The segment added new contracts worth $635 million in 1Q18, including for the deployment of smart sensor networks for automatic water reading and smart street lighting solutions.
Meanwhile, CGS-CIMB Research analyst Lim Siew Khee says a potential contract win from the US Marine Corp could give STE a shot in the arm.
“We sensed from management’s tone that it is hopeful of securing an amphibious combat vehicle contract with the US Marine Corps (in a collaboration with Science Applications International Corporation). The results will be known by end-June/July,” says Lim.
“Winning the contract could instantly lift STE’s global profile in the defence market,” he adds.
CGS-CIMB is keeping its “add” call on ST Engineering with an unchanged target price of $3.80.
In addition, Lim points out that STE has a strong orderbook of $13.4 billion as at end-March, which sustains its earnings visibility.
“Year-to-date contract win momentum has been strong, totalling close to $1.1 billion, mainly from aerospace and electronics,” says Lim. “We see opportunity to accumulate the stock on any share price weakness as contract wins [and a] stronger 2H18F could re-rate it.”
As at 10.59am, shares of ST Engineering are trading 4 cents higher at $3.43. According to CGS-CIMB valuations, this implies an estimated price-to-earnings ratio of 19.4 times and a dividend yield of 4.5% for FY18.
