Maybank Securities analyst Krishna Guha and JP Morgan analyst Shawn Ng have both kept their respective “buy” and "overweight" calls on Singapore Technologies Engineering S63 (ST Engineering) at raised target prices of $4.60 from $4.30 previously and $4.60 from $4.14 previously.
On June 25, the group held the groundbreaking of its new, artificial intelligence (AI)-ready green data centre.
The 7.5 megawatt (MW) data centre will be ST Engineering’s fourth, taking the company’s data centre footprint to over 30MW with a cumulative investment of $400 million.
“The new data centre will strengthen ST Engineering’s digital business offerings. With capital expenditure (capex) spread over three years, we view the development as augmenting group revenue while keeping enough cover for the dividend,” writes Maybank's Guha in his June 27 report.
The new data centre will also have a power usage effectiveness (PUE) of 1.25, and it is designed to accommodate high power density AI and graphic processing unit (GPU)-based workloads in excess of 20 kilowatts (kw) per rack.
The facility will also be cooled by various cooling systems including the proprietary Airbitat data centre cooling system and will have 2700 square metres (sq m) of solar panels to offset energy requirements, allowing it to go beyond a tier 3 rating and meet Building and Construction Authority of Singapore-Infocomm Media Development Authority (BCA-IMDA) Green Mark Platinum standards.
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Guha notes: “The data centre will be built with a capex of $120 million. Interestingly; capex of $16 million per MW is much higher than the existing data centres and is likely due to higher specs and green features.”
ST Engineering has indicated that the facility has already received strong interest from customers.
With a conservative assumption of $300 per kw monthly, the facility could point to a potential back-ended revenue of $20 million to $25 million on an estimated 30% earnings before interest, taxes, depreciation and amortisation (ebitda) margin.
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“With an estimated $1 billion of annual free cash flow and data centre capex spread over three years, we see reasonable cover for the around $500 million annual payout. That said, we would have preferred a partly or fully committed undertaking given current data centre supply and high interest rates,” writes the analyst.
Taking into account the new facility and prior order wins, Guha has raised his earnings estimates for the FY2025 to FY2026 by 2% to 3%.
Overall for the group, upside factors noted by Guha include higher-than-expected passenger-to-freighter (PTF) work from airlines upgrading their passenger fleets, better-than-expected margins if aircraft original equipment manufacturers (OEMs) slow down their aftermarket expansion from full order books, a broader recovery in marine orders from a demand rebound for oilfield services vessels and specialised ship repair and lastly, order book growth from US defence and infrastructure project wins.
“An area that ST Engineering has been pursuing but where large contracts have been few and far in-between.”
Conversely, downside risks include the ongoing rise in inflation, which could see a supply crunch in aircraft materials and equipment, structural threat from aircraft OEMs like Boeing and Airbus becoming more aggressive in expanding in the aftermarket-maintenance, repair and overhaul (MRO) space, and finally, a major disruption in airborne cargo growth due to the aftermath of a US-China trade war which could hurt aircraft PTF conversion demand.
JP Morgan's Ng on the other hand, is less bullish on the new data centre.
He writes: "Overall, we view this a mild positive development for ST Engineering given Singapore’s relatively better return on investment (ROI) for the data center industry amid limited supply and high demand."
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By using Singtel's $200 million ebitda for 60 MW data center capacity as a reference point, Ng notes that the estimated ebitda derived from ST Engineering’s existing 22.5 MW data center capacity is around $75 million assuming "full utilisation".
He is however, more optmistic on the group's other developments, such as its defence and public secuirty (DPS) segment's recent clinching of ammunition contracts worth over $100 million.
On this Ng writes: "Capitalising on the ongoing rush to replenish ammunition and tight capacity (periods of underinvestment), ST Engineering’s recent breakthrough North Atlantic Treaty Organization (NATO) standard 155 mm contract and available capacity open up an opportunity to capture incremental orders as countries seek to restock ammunition outside of European sources."
ST Engineering's commercial aerpsapce (CA) segment is another that looks bright in its outlook.
"The Airbus production bottleneck is expected to impact ST Engineering’s nacelle business. The medium-term outlook remains upbeat due to very strong demand for narrowbody aircraft, a preference for LEAP engines and Airbus’s ability to achieve medium-term targets for deliveries," writes Ng.
"Overall, we reiterate our positive stance on ST Engineering seeing further orderbook upside and earnings growth as it executes on its robust and improved orderbook," concludes the analyst.
Key downside risks noted by Ng include a prolonged global recession which would weigh on the CA segment's recovery, order book momentum stalling and cancellation or delays, lower-than-expected dividend payouts, unexpected impairments or bad debt provisions, and lastly, higher-than-expected costs.
As at 11.13 am, shares in Singapore Technologies Engineering were trading 11 cents higher or 2.63% up at $4.30.
