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RHB Bank Singapore lifts ST Engineering’s TP to $4.25 as it expects its strong share price performance to continue

Douglas Toh
·2-min read

The stock’s share price has risen 10% year-to-date and outperformed the STI by 7%.

RHB Bank Singapore analyst Shekhar Jaiswal is maintaining his “buy” call on Singapore Technologies Engineering (ST Engineering) S63 as he expects the stock’s strong share price performance to continue.

The analyst has also raised his target price on ST Engineering to $4.25 from $4.05 previously, noting that the stock’s share price has risen 10% year-to-date (ytd) and outperformed the benchmark Straits Times Index (STI) by 7%.

Jaiswal’s new target price represents an upside of 15% to ST Engineering’s share price of $3.70 as at its close on Aug 2. The new target price, which includes a 6% environmental, social and governance (ESG) premium over the fair value of $4, also represents a yield of 4%.

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“We continue to believe that ST Engineering is positioned to benefit from the revival in global air travel and increased government spending on infrastructure and defence,” he writes.

In his report dated Aug 3, the analyst continues to view ST Engineering as a “special investment opportunity” with strong earnings growth potential and a well-supported defensive yield.

He believes the group’s FY2023 to FY2025 earnings will be supported by a recovery in global aviation traffic boosting its commercial aerospace (CA) segment, contributions from its TransCore acquisition supporting strong growth for its urban solutions and satcom (USS) segment starting FY2024 and lastly, rising defence spending supporting growth for its defence public security (DPS) segment.

Jaiswal expects the CA segment to deliver 14% ebit CAGR, the USS segment to deliver 64% ebit CAGR, and the DPS segment to deliver 7% ebit CAGR.

“ST Engineering’s outstanding orderbook stands at an all-time high of $25.4 billion, providing over two years of revenue visibility,” he notes.

ST Engineering will be announcing its results for the 1HFY2023 ended June 30 before the market opens on Aug 11.

“We continue to expect [that] in FY2023 ST Engineering will deliver about 6% growth in revenue to $9.53 billion and around 14% growth in profit to $549 million. In line with management expectations, we believe that project deliveries will be weighted in 2HFY2023, implying that upcoming 1HFY2023 reported numbers could account for less than 50% of our full-year estimates,” says Jaiswal.

He continues: “ST Engineering should deliver a 17% profit compound annual growth rate (CAGR) during FY2022 to FY2025 and continue to pay 16 cents of dividends each year thanks to its strong free cash flow (FCF) generation despite elevated debt levels. We make small adjustments of around 1% to our earnings estimates and roll forward our valuation basis to 12-month forward estimates.”

As at 4.10pm, units in ST Engineering are trading one cent higher or 0.27% up at $3.70 on Aug 4.

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