RHB notes potential earnings miss for ST Eng in 2HFY2022, but still maintains ‘buy’

RHB has maintained its 'buy' call despite saying that the share price is 'underperforming'.

RHB Group Research analyst Shekar Jasiwal has maintained his “buy” rating and target price of $4.60 on Singapore Technologies Engineering (ST Engineering), despite saying that the company’s share price has been “underperforming”.

In a Sept 23 report, Jasiwal says the underperformance was due to concerns over the potential for “unexciting” 2HFY2022 earnings amidst a weakening macro environment and a sharp rise in debt, especially in a rising interest rate environment.

Citing conversations with some investors, he says that the disappointment around the recent bottom-line miss during 1HFY2022 ended June, as well as the potential for another miss for 2HFY2022 earnings amidst a weakening macroeconomic environment remains one of the key concerns.

In addition, Jasiwal also notes the rise in ST Engineering’s debt levels to fund the TransCore acquisition, saying that it is a concern, especially in a rising interest rate environment.

Nonetheless, he does expect the company’s net debt to equity to gradually improve on the back of higher earnings and improvement in cash flows but still estimates it to remain above 1.5x in 2024. Jasiwal is forecasting a compounded annual growth rate of 8% on ST Engineering’s core profit in 2021-2024.

Elaborating, Jasiwal says that he “stays confident” of ST Engineering’s defensive characteristics, which are supported by “a record-high order book, growing defence revenue, and Urban Solutions & Satcom Security’s (USS) potentially sharp recovery,” adding that he expects ST Engineering’s distribution per share (DPS) of 16 cents to stay steady.

Most notably, he points out that the commercial aerospace business has secured a five-year component maintenance-by-the-hour (MBH) contract to service Thai budget carrier Nok Air’s Boeing 737-800 fleet.

Under this contract, ST Engineering will provide a full suite of component support solutions covering component repair management, pool support, and dedicated consignment stock in Bangkok for the airline’s entire 737-800 fleet. The contract is a renewal of the partnership in component maintenance, repair and overhaul (MRO) between Nok Air and STE.

“This will further strengthen its commercial aerospace order book, in our view, which has reported an average of $930 million in order wins each quarter since 1QFY2021,” Jasiwal says.

He also expects strong recovery in SATS’s USS unit, along with a sustained improvement in the Defence & Public Security wing to drive 2023-2024 earnings growth.

He also points out that with $3.1 billion worth of new contracts in 2QFY2022 , which is 69% higher y-o-y,  and 28% higher q-o-q, this is St Engineering’s highest order backlog of $22.2 billion, which implies a book-to-bill ratio of 2.7 years.

In addition, $4.6 billion of this order book is expected to be delivered in 2HFY2022, representing 100% of his 2HFY2022 revenue estimates.

As of 12.26pm, shares of ST Engineering are trading at $3.62, with a FY2022 dividend yield of 4.8% and P/B ratio of 4.7x.

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