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ST Engineering order book reaches new high despite US divestment, analysts divided

ST Engineering could refinance a portion of its short-term loans in FY2023 by issuing fixed coupon bonds with a lower yield.

With a robust order book, ST Engineering is clinching contracts on the road, writes Maybank Securities Research analyst Kelvin Tan.

“ST Engineering’s order book stands at a record high $25 billion, up 12.6% q-o-q, excluding the US$1.9 billion US marine order book which has been divested. Notably, we view TransCore’s US$1.5 billion contract wins most positively as they demonstrate authority’s confidence in TransCore’s tolling solutions,” writes Tan.

Assuming a 30% project implementation phase, Tan expects the contracts to improve earnings visibility by adding at least $120 million per annum in revenue in the next three to four years.

In a Nov 28 note, Tan maintains his “buy” call on ST Engineering with a higher target price of $4.30 from $4.20 previously. The new target price represents a 23% upside against the last traded price of $3.49.

“We remain optimistic on STE’s growth prospects given continued aviation sector recovery, healthy revenue visibility with strong contract win momentum and well-balanced fixed vs floating interest rate at 54%/46% respectively,” says Tan.

However, as the cost of debt rises, acquisition funding will face pressure from rising interest rates as the short duration exposes it to rollover risk upon maturity, notes Tan. “We think ST Engineering will refinance a portion of its short-term loans in FY2023 by issuing fixed coupon bonds with a lower yield. With US$32 million reserves on its balance sheet as of Sept 30, ST Engineering should benefit from reduced interest rates for its next bond issuance or loans.”

Steady dividends

Meanwhile, RHB Group Research analyst Shekhar Jaiswal maintains his “buy” call with an unchanged target price of $4.15, which includes an 8% ESG premium based on RHB’s in-house methodology.

ST Engineering reported 3QFY2022 revenue of $2.2 billion, up 22% y-o-y and unchanged q-o-q.

All businesses reported revenue growth y-o-y. Commercial aerospace grew 28% y-o-y, while urban solutions and satcomm jumped 74% y-o-y. Defense and public security, meanwhile, grew 5% y-o-y. However, on a q-o-q basis, growth in commercial aerospace revenue was offset by lower revenue in the other two segments.

According to Jaiswal, ST Engineering has a steady dividend outlook. The company declared a quarterly dividend per share (DPS) of 4 cents and a full-year DPS of 16 cents implies a yield of some 4%. “Despite some concerns about higher interest costs, we continue to like ST Engineering for its strong revenue visibility and a defensive dividend outlook.”

Ahead of the results release, DBS held a “buy” call on ST Engineering in a Nov 7 report with a target price of $4.70.

Near-term headwinds

Citi Research analysts are more bearish, citing near-term operational headwinds that persist.

In a Nov 28 note, Jame Osman recommends investors “sell” ST Engineering with a lower target price of $3.26 from $3.49 previously.

Jame lowers his FY2022-2023 earnings per share (EPS) estimates by 4%-7& after factoring in the TransCore acquisition contribution, higher interest cost due to increase in borrowings and higher rates, offset by better year-to-date commercial aerospace margins and positive impact from recent proposed divestment of ST Engineering’s US marine business from FY2023.

“We believe positive commentaries, [such as] strong order book, defensive business, air travel recovery appear already priced-in. We remain cautious over potential operational headwinds, including integration risks from recent acquisitions as well as elevated gearing levels,” he writes.

As at 11.41am, shares in ST Engineering are trading 7 cents lower, or 2.0% down, at $3.42.

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