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ST Engineering's defensive business model positive for the counter: RHB

Felicia Tan
Felicia Tan • 3 min read
ST Engineering's defensive business model positive for the counter: RHB
Shares in ST Engineering closed 1 cent lower or 0.26% down at $3.84 on Nov 29.
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RHB Group Research analyst Shekhar Jaiswal has kept “buy” on Singapore Technologies Engineering (ST Engineering) with a target price of $4.85, as he deems the group as preparing for its “next leg of growth”.

To Jaiswal, the group’s defensive business model has enabled it to deliver “credible earnings” in the FY2020 even though the Covid-19 pandemic has delayed the achievement of its growth targets that were set in 2018.

To this end, ST Engineering has identified new 2026 targets for its reorganised business. The group has indicated that it intends to grow its annual revenue at two to three times the global GDP growth, to over $11 billion by 2026.

“Assuming it manages to sustain its current and pre-pandemic net margin of 7.3%, it would imply a profit of $800 million in 2026 and a 2023-2026 compound annual growth rate (CAGR) of 6.6%,” writes Jaiswal in a Nov 26 report.

“If it delivers the planned revenue and profit growth, ST Engineering could sustain our forecasted profit CAGR of 8% beyond 2023 as well,” he adds.

In addition, ST Engineering has estimated that domestic travel will recover to the levels seen in 2019 by 2013. International travel, as well as the global aircraft fleet are also expected to recover to pre-Covid-19 levels by 2024.

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“To leverage on the longer-term growth in aircraft fleet, ST Engineering is investing in passenger to freighter (P2F) conversion business. It has delivered five narrowbody P2F since 2020 and 12 medium widebody P2F since 2018,” says Jaiswal. “It has more than 60 and 80 aircraft of each type on order for deliveries. ST Engineering will double its annual P2F conversion capacity to 30 by 2022 and increase it to 60 by 2026. It expects the P2F business to generate SGD700m of annual revenue by 2026”.

There are also opportunities for the counter in smart city solutions, notes the analyst, as the group sees the relevant smart city market to grow at a CAGR of 8% to reach US$500 billion ($685.37 billion) in 2026.

“Growth will be driven by demand for urbanisation, digitalisation, and sustainability. Its announced acquisition of Transcore for US$2.68 billion, which is expected to be completed by 1QFY2022, will help it achieve the targeted 2026 smart city revenue of $3.5 billion, from current revenue of $1.7 billion,” says Jaiswal.

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“ST Engineering has identified international defence business as growth vector with an addressable market of US$5 billion over [the] next five years. This growth will be driven by adoption of digital technologies in military and legacy platforms being upgraded,” he adds.

Shares in ST Engineering closed 1 cent lower or 0.26% down at $3.84 on Nov 29.

Photo: Albert Chua/The Edge Singapore

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