Maybank Securities analyst Krishna Guha has kept his “buy” call and target price of $4.30 unchanged on Singapore Technologies Engineering S63 (ST Engineering), following the company’s recent securing of contracts worth over $100 million.
The contracts are for North Atlantic Treaty Organisation (NATO)-standard 155-millimetre (mm) ammunition for new customers in Europe, as well as orders for 40 mm ammunition from European customers.
“The new order wins will further increase the year-to-date (ytd) contract wins by the defence and public security segment by more than 6%,” notes Guha in his June 19 report.
Presently, the total order book for ST Engineering stands at $27.7 billion.
Meanwhile, on the end of the company’s commercial aviation segment (CA), ST Engineering’s Pensacola, Florida maintenance, repair and overhaul (MRO) complex saw the ground breaking for its third aircraft maintenance hangar earlier in the month.
Guha writes: “ The new hangar will increase ST Engineering’s operational capacity in Pensacola by a third. Meanwhile, TransCore (under the urban Solutions and SATCOM business) has been selected by the Missouri Department of Transportation (MoDOT) to deploy its traffic management system in St. Louis and Springfield.”
He adds: “This builds upon TransCore’s decades-long partnership with MoDOT. Earlier in 1QFY2024, the group had guided for 10% y-o-y revenue growth for TransCore.”
The analyst concludes: “The new order wins and growing operational capacity further add to visibility of mid-teens earnings growth. Coupled with 5.3% dividend yield, we think the yield growth thesis is unchanged for the stock.”
Upside factors noted by Guha include higher-than-expected passenger-to-freighter (PTF) work from airlines, better-than-expected margins if aircraft original equipment manufacturers (OEMs) slow down their aftermarket expansion, 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, where large contracts have been few and far in-between.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
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-MRO space, and a major disruption in airborne cargo growth due to the aftermath of a US-China trade war could hurt aircraft PTF conversion demand.
As at 11.41 am, shares in Singapore Technologies Engineering were trading flat at $4.03.
