Contract wins, acquisitions lift ST Engineering shares to multi-year high

SINGAPORE (July 5): It has been a busy couple of months for Singapore Technologies Engineering.

The Temasek Holdings-backed defence and engineering group in June inked a partnership agreement with telecommunications equipment manufacturer Nokia to collaborate on key technology areas such as 5G and Internet of Things (IoT).

In the same breath, ST Engineering also announced a joint venture between its aerospace unit and the engineering arm of Vietnam Airlines to provide component maintenance, repair & overhaul (MRO) solutions in Vietnam.

Then, the group revealed that its unmanned drone system, DroScan, would be employed in a trial by Air New Zealand to carry out inspection checks of its aircraft when they undergo heavy maintenance checks at its facility near Changi Airport.

Among several other deals over the past month, ST Engineering also signed a memorandum of understanding with Singapore’s National Water Agency to develop and leverage digital technologies that will enhance its intelligent water management system and operations.

And the positive news flow has not gone unnoticed by investors.

Since end-May, shares in ST Engineering have climbed more some 8.7% to hit a multi-year peak of $4.25.

As at 4.15pm on Friday, its shares are trading 0.2% lower for the day at $4.23.

“We expect the stock to keep getting re-rated amidst completion of acquisitions and continuing order wins,” says Shekhar Jaiswal, an analyst at RHB Research, which ranks ST Engineering as its top pick in the country.

The brokerage is keeping its “buy” call on ST Engineering with an unchanged target price of $4.45, implying an upside of close to 5%.

“On an uncertain macroeconomic outlook, ST Engineering’s double-digit profit CAGR outlook, diversified business, record-high orderbook with two years of revenue visibility, positive FCF generation capability, and relatively high dividend yield has led to it outperforming the STI by 12% year-to-date,” Shekhar adds.

On top of the contract wins, contributions from acquisitions are also expected to be a key earnings growth catalyst for ST Engineering.

The group completed its acquisition of Middle River Aerostructure Systems (MRAS) from General Electric Company in April, which is expected to turn earnings-accretive from the second half of the year.

MRAS is an established original equipment manufacturer (OEM) of engine nacelle systems for both narrowbody and widebody aircraft, including the Airbus A330 and Boeing 747-8.

Meanwhile, ST Engineering is also confident of completing its acquisition of Belgium-based satellite communications firm Newtec Group NV by 2H19.

If completed, Newtec is expected to start contributing to ST Engineering’s earnings growth from FY20.

According to RHB forecasts and valuations, shares in ST Engineering are trading at a price-to-earnings (PE) ratio of 21.3 times and a dividend yield of 3.5% for FY19F.