SINGAPORE (Feb 26): DBS is upgrading ST Engineering to "buy" while RHB and CIMB are maintaining their "buy" calls given the group's expansion into new business areas, improving margins from aerospace projects and strong order book pipeline.
ST Engineering is eyeing healthcare and medical technology as new areas for growth and is setting up a team to help develop solutions that would enable the hospitals to operate more efficiently and lower healthcare costs.
According to RHB analyst Shekhar Jaiswal, Aethon, a company that ST Engineering invested in last year, already provides logistics services to hospitals in the US via the use of robots.
In Singapore, the robots will be deployed to manage laundry supply chain at three Singapore hotels and will partner with the Land Transport Authority to develop autonomous buses for public road trials, says CIMB analyst Lim Siew Khee.
In the near term, ST Engineering is pushing for defence exports, higher passenger-to-freighter (P2F) conversions and pursuing Smart City-related contracts in and outside of Singapore.
ST Engineering is looking to grow its aircraft leasing fleet size, secure more contracts for its new aircraft cabin interiors business and add new hangar capacity to its US operations at Pensacola.
4Q17 profit before tax (PBT) for its Aerospace division at $94.5 million -- up 20% quarterly and 9% yearly -- was "commendable" despite steep P2F learning curves for the A330-300 and A330-200 engines, says DBS analyst Suvro Sarkar.
Components, engine repair and overhaul PBT doubled y-o-y to $23 million, the strongest quarter since 4Q12 and the third straight q-o-q growth, signalling the return of the MRO (Maintenance Repair and Overhaul) cycle for CFM engines.
"We believe the segment will remain strong until 2022," says Suvro. As a result, aerospace PBT margin expanded to 12.5% in FY17 from 12% in FY16.
As of end 4Q17, ST Engineering's orderbook stood at $13.2 billion, boosted by a large contract secured earlier this year for the construction of the Singapore Armed Forces’ next-generation Armoured Fighting Vehicles (AFVs), which Suvro estimates to be worth $1 billion.
"The orderbook provides robust revenue visibility into FY18/19, with a roughly 1.9 times book-to-bill ratio," says the analyst.
Finally, ST Engineering's Marine division could have bottomed out. Its 4Q17 PBT of $0.4 million was dragged down by a $17 million loss from shipbuilding with cost overrun for ConRo vessels.
See: ST Engineering says FY17 earnings up 5.6% to $511.9 mil on higher sales
As at 12 noon, shares in ST Engineering are up 4 cents at $3.43 or 19.7 times FY18 earnings. DBS, CIMB and RHB have target prices of $3.90, $3.80 and $4.04 respectively.
