Maybank Securities' Kelvin Tan has maintained his "buy" call and $4.10 target price on ST Engineering, following the engineering conglomerate's 1QFY2023 business update.
For the three months to March, ST Engineering S63 reported revenue of $2.3 billion, up 13% y-o-y, with growth across all its business segments, including TransCore, its US-based traffic management unit acquired for US$2.7 billion.
However, the revenue thus far is "marginally" below Tan's estimates.
Nonetheless, underpinned by a record order book of $25.4 billion, he is optimistic that the current FY2023 is a turnaround point for ST Engineering as it transforms from a dividend yield play to one of "durable and sustainable growth."
"We believe all three of STE’s business divisions are on track for margins to recover in FY2023," writes Tan in his May 16 note.
Tan describes ST Engineering, which is likely to increase its order book to $27 billion by end of the year, as an inexpensive long-term entry opportunity, with reduced debt and potentially higher earnings a key re-rating catalyst.
RHB Bank Singapore's Shekhar Jaiswal, similarly, has kept his "buy" call on the stock, along with a target price of $4.05.
"We continue to like ST Engineering for its strong revenue visibility and defensive dividend outlook," says Jaiswal, who expects the company to deliver a 17% profit CAGR between FY2022 and FY2025.
He is also cheered by the company's ability to produce significant free cash flow, which will lead to a gradual drop in its net debt-to-equity ratio during 2023-2025.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
ST Engineering used to be debt free but took on debt to fund the acquisition of Transcore.
In her May 15 note, CGS-CIMB's Lim Siew Khee expects ST Engineering to report stronger earnings for the coming second half of the year, with better contributions from urban solutions and satellite communications projects.
In addition, supply chain pressure is seen to be relieved in 4QFY2023, which will further boost earnings, writes Lim, who has kept her "buy" call and $4 target price.
In his May 16 note, UOB Kay Hian's Roy Chen raised his earnings estimate of the stock by 1.7% for FY2023 and 3.2% for the coming FY2024, citing better margins.
Besides the exit of the loss-making US shipyards, other factors contributing to the better margins include TransCore turning earnings positive, and also further improvements from commercial aerospace.
Chen has kept his "buy" call and $4 target price, which is based on a WACC of 7.5% and terminal growth rate of 2.5%.
On the other hand, Citi Research's Jame Osman prefers to stay cautious. He notes the recovery seen in certain key sectors such as aerospace.
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However, he believes that near term risks, such as component and labour shortage, will remain a bugbear.
"We retain our cautious view primarily as we believe market expectations for near-term earnings growth appear too optimistic and may not adequately discount risk factors," writes Osman in his May 15 note, as he maintains his "sell" call.
Osman believes that his target price of $3.35, tied to 22x FY2023 earnings, has already priced in "positive narratives" including the strong order book and air travel recovery.
