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ST Engineering gets 4 'buys' as aerospace, order book continue to soar

Stanislaus Jude Chan

SINGAPORE (Nov 12): Analysts are buoyant on ST Engineering, as the technology, defence and engineering conglomerate posted 3Q19 earnings in line with expectations on the back of record-high revenue.

For 3Q19 ended September, STE saw its revenue jump 27% to $2.07 billion – the highest year-on-year growth in over a decade.

The revenue surge was driven by Aerospace revenue, which soared 53% y-o-y to $1.1 billion on the consolidation of its recently acquired Middle River Aircraft Systems (MRAS), as well as revenue recognised from various end-of-programme reviews.

However, earnings for the quarter grew by a more moderate 3% to $139.1 million.

The group’s 3Q19 earnings were impacted by a provision of $14.2 million before tax made for the arbitration outcome with Hornbeck Offshore Services. Excluding this, earnings would have been 12% y-o-y higher at $150.3 million.

See: ST Engineering sees 3Q earnings edge up 3% as most divisions face drag

“STE’s 3Q19 core earnings of $150.3 million was in line, and its growth story is unfolding nicely,” says DBS Group Research lead analyst Suvro Sarkar in a Nov 12 report.

“The integration of MRAS in the Aerospace division is tracking well, while the assimilation of Newtec and Glowlink in the Electronics segment is ongoing,” he adds.

DBS is maintaining its “buy” call on STE with an unchanged target price of $4.64.

“We are more conservative on margins and earnings compared to consensus but still expect STE to generate high single digit core earnings growth in FY18-21,” Sarkar says. “STE’s current valuation of 20x FY20F PE looks elevated at first glance but is reflective of its record-high orderbook."

Lim Siew Khee, an analyst at CGS-CIMB Research, believes that STE’s diversified portfolio could continue to fuel its growth amid the challenging macroeconomic landscape.

“We like STE for its diversification of business,” says Lim, who has a “high conviction” call on the counter.

Lim is keeping her “add” recommendation on STE with a higher target price of $4.47, raised from $4.36 previously.

The analyst notes STE’s Electronics contract wins have levelled up from close to $560 million per quarter in 2016-18 to close to $780 million per quarter in 2019 on the back of more smart-city related projects.

“Notably, in 3Q19, it secured $833 million of new contracts with a bulky close to $300 million smart-city related next-generation emergency responses management system for a public safety agency out of Singapore,” Lim says.

At the same time, she forecasts that its Land Systems profit will grow 44% y-o-y in FY20F, with the absence of tax losses and ramp-up in delivery of the Hunter Armoured Fighting Vehicle (AFV) from 1Q20F.

On the Marine front, Lim expects profits to grow 9% y-o-y to $57 million in FY20F, backed by the execution of orders won since 2018.

Meanwhile, Maybank Kim Eng Research analyst Neel Sinha notes that STE is “still on the lookout to acquire new capabilities,” which could boost its diversification merits.

“STE’s various growth initiatives through M&A, efficiency improvements and portfolio rationalisation appear to be on track,” Sinha says in a Nov 11 report. “We expect more smart city-related M&As with management targeting a doubling of revenues from this business by FY22 from the close to $1 billion achieved in FY17.”

Sinha is keeping his “buy” recommendation on STE with an unchanged target price of $4.50.

While OCBC Investment Research agrees that STE is a “clear outperformer”, it warns that “the upside may be diminishing”.

“On a total returns basis, STE has outperformed the Straits Times Index (STI) by a wide margin year-to-date, with the reinvested total return for STE at 22.7% and 10.4% for the STI, based on Nov 8 closing prices,” says OCBC’s research team in a note on Nov 11.

However, the brokerage continues to keep STE on a “buy” rating with an unchanged fair value estimate of $4.64.

“STE has been a preferred pick and remains so, given its relatively defensive nature and potential growth,” OCBC says.

As at 12.54pm, shares in ST Engineering are trading 11 cents higher, or up 2.8%, at $4.11.

According to CGS-CIMB valuations, the counter is trading at an estimated price-to-earnings (P/E) ratio of 21.96 times, a price-to-book value (P/BV) of 5.29 times and a dividend yield of 3.88% for FY19F.