Analysts are mixed on Singapore Technologies Engineering S63 ’s (ST Engineering) prospects after the group posted its business update for the 3QFY2024 and 9MFY2024 ended Sept 30.
ST Engineering’s revenue for the 9MFY2024 rose by 14% y-o-y to $8.3 billion while 3QFY2024 revenue also grew by 14% y-o-y to $2.8 billion.
While analysts from Citi Research, Morningstar and RHB Bank Singapore remain upbeat in their assessment, Maybank Securities analyst Krishna Guha has downgraded his call to “hold” with a lower target price of $4.70 from $4.80 previously.
“While ST Engineering continues to execute well, order book growth has slowed down. Unless reversed, this will weigh on ebit margins,” says Guha. “Further, the turnaround in the urban solutions business is taking time.”
In his Nov 19 report, the analyst notes a “mixed operating trend” for the group with defence and public security anchoring top-line growth and offset by slowing momentum from commercial aerospace and urban solutions.
The group also reported a 3.6% q-o-q dip in its order book of $26.9 billion, which was mostly due to weakness in the US dollar (USD). During the 3QFY2024, ST Engineering saw a total of $2.2 billion in new order wins. Its commercial aerospace business saw order wins in engine and airframe maintenance, repair and overhaul (MRO), while order wins in the group’s defence and public security business were “well spread” across digital cyber security and ammunitions. Order wins from urban solutions were on smart transportation and back office solutions.
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“Following a 14% year-to-date rise, yields have compressed and risks are to the downside for earnings growth as the order book tapers off,” says Guha.
Meanwhile, Morningstar’s Lorraine Tan has maintained her “four star” rating with a higher fair value estimate of $5.25 from $4.72 previously.
In her view, ST Engineering’s 3QFY2024 update reflected “continued strong growth in its defence and public security business”, which drove the group’s overall revenue by 14% y-o-y.
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The company sees slower growth outlook for passenger-to-freight conversions, says Tan.
Even though the markets may have reacted to the news that passenger-to-freight (PTF) conversion demand may see slower growth from less conversions of older aircraft with airlines hanging on to their planes for longer on the back of aircraft delivery delays, Tan believes that the slower growth from commercial aerospace activities will be offset by stronger defence and public security segment revenue. A rise in airlines' heavy maintenance demand is also expected to help offset slower PTF demand, she says.
“Our fair value prices ST Engineering at 20 times FY2025 P/E, which is well within its historical range,” says Tan.
“We view slower growth in PTF activities as temporary and push back growth assumptions to FY2026 – FY2027,” she adds. “With stronger near-term maintenance demand, average earnings growth over our 10-year projected period for the commercial aerospace segment is little changed at 7%.”
As the analyst sees lower interest expenses amid easing rates going ahead, Tan estimates ST Engineering's FY2023 – FY2028 earnings per share (EPS) compound annual growth rate to be a “healthy” 14.4%.
“We think ST Engineering is reasonably attractive at the current price level,” she writes.
Citi analyst Luis Hilado has also maintained his “buy” call with an unchanged target price of $5.12.
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To him, ST Engineering’s 9MFY2024 revenue was somewhat in line with the estimates of the Bloomberg consensus at 74% of the consensus’ full-year estimates.
Like Maybank’s Guha, Hilado notes the slowing order win momentum in the 3QFY2024 for ST Engineering’s commercial aerospace and defence and public security segments on a y-o-y and q-o-q basis, even though management attributed it to foreign exchange (forex) impact.
Hilado also highlighted underlying long-term order book drivers such as a 30% hangar capacity expansion by FY2026 under the group’s commercial aerospace segment as well as leap engine capability and capacity upgrades.
However, he also sees that PTF feedstock constraints are providing a challenge in FY2025 that management is seeking to replace with more MRO contract work.
With this, Hilado has maintained his forecasts for the group as he sees healthy demand across its main divisions continuing to drive order book growth.
“A high base of revenue growth this FY2024 is likely to lead to relatively slower FY2025 revenue growth but in the longer-term hangar expansion and potential new order book wins could provide for a new growth wave in FY2026,” he writes.
RHB analyst Shekhar Jaiswal has kept his “buy” call as ST Engineering’s 3QFY2024 revenue accounted for 52% of his 2HFY2024 estimates. Jaiswal’s unchanged target price of $5.32 is the highest among the analysts here.
The group’s softened contract win momentum also stood in line with the analyst’s expectations.
That said, Jaiswal is remaining upbeat on the group’s revenue and profit momentum. He expects ST Engineering to deliver a profit compound annual growth rate (CAGR) of 15% and steady dividends in FY2023 - FY2026.
As at 11.20am, shares in ST Engineering are trading 14 cents higher or 3.15% up at $4.59.
