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RHB remains positive on ST Eng for its ‘strong’ earnings potential and ‘well-supported dividend yield’

RHB Bank stays positive on Singapore Technologies Engineering as the company continues to display strong earnings potential.

RHB Bank Singapore analyst Sheikhar Jaiswal is keeping “buy” on Singapore Technologies Engineering (ST Engineering) S63 as the company announced the building of a new airframe maintenance facility at Singapore Changi Airport on Sept 23. The analyst has also kept his target price unchanged at $4.50. This includes a 6% environmental, social and governance (ESG) premium over the fair value (FV) of $4.25, based on RHB’s in-house methodology.

In his report dated Sept 25, Jaiswal notes that the facility’s expansion of four hangar bays looks to support the earnings of ST Engineering’s commercial aerospace (CA) segment as international aviation traffic continues to pick up .


“We expect ST Engineering to deliver [an] 18% profit compound annual growth rate (CAGR) in FY2022 to FY2025, and to continue paying 16 cents of dividends each year, while reducing its debt levels,” writes the analyst.

The new airframe maintenance facility, which costs $170 million to develop and will span 84,000 square metres (sqm), will be equipped to service wide-body aircraft and will include a hybrid paint and maintenance bay.

Once fully operational, the facility will contribute an additional 1.3 million man-hours per annum (p.a.), which is around 10% of ST Engineering’s current global airframe maintenance, repair and operations (MRO) capacity.

Notably, ST Engineering’s new facility is pushing for environmental sustainability and operational efficiency through including solar panels on the facility’s roof to generate solar energy, having automated guided vehicles to retrieve and transport tools and parts, as well as incorporating digital tools for paperless operations.

Jaiswal notes: “We have not incorporated the capex and potential upside to the CA segment’s earnings into our estimates yet.”

ST Eng should remain a part of investors’ portfolios

ST Engineering, which closed at $3.83 on Sept 22, marked a year-to-date (ytd) increase of 14.3% and outperformed the benchmark Straits Times Index (STI) by around 15.7%, notes Jaiswal.

As such, he continues to recommend that ST Engineering be a part of investors’ portfolios, due to the company’s “strong earnings growth potential and well-supported dividend yield”.

He writes: “We believe its earnings will be supported by; a recovery in global aviation traffic- boosting its CA segment, contributions from its TransCore acquisition and the recently completed rightsizing exercise- supporting growth for its urban solutions and satcom (USS) segment and growth in its defence and public security (DPS) segment earnings as the orderbook is delivered.”

From FY2022 to FY2025, Jaiswal expects ST Engineering’s segments of CA, USS and DPS to deliver 18%, 63%, and 8% earnings before interest and taxes (ebit) CAGR respectively.

Another plus for ST Engineering is its orderbook, which stands at a record-high of $27.7 billion, providing close to three years of revenue visibility. Furthermore, the company’s ability to produce significant free cash flow will lead to a gradual drop in its net debt-to-equity ratio, while allowing it to sustain its full-year dividend per share of 16 cents.

Whilst interest rates are expected to remain elevated in the near term, ST Engineering last guided for a FY2023 borrowing cost of low 3% and a FY2024 borrowing cost of mid-3%.

Key drivers noted by Jaiswal include strong order wins and contributions from acquisitions, whilst key risks consist of the slower revival in the CA sector, a lower than expected contribution from acquisitions, and lastly a delay in the implementation of Singapore’s smart nation initiative.

As at 12.25pm, shares in ST Engineering are trading at three cents higher or 0.78% up at $3.86.

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