RHB Bank Singapore analyst Shekhar Jaiswal is rolling forward his valuation for Singapore Technologies Engineering S63 (ST Engineering), not only for its “defensive dividends” of 4 cents per quarter and “strong profit growth”, but on recent announcements.
One such announcement is the development of a “highly secure and AI-ready data centre” in Jalan Boon Lay, which will cost $120 million and be ready by 2026.
This will be ST Engineering’s fourth data centre in Singapore. According to a June 25 announcement, the seven-storey facility is designed to meet international cybersecurity standards and standards for responsible AI development, and aims to attract customers prioritising security and sustainability.
The data centre will achieve a high Power Usage Effectiveness (PUE) of 1.25, exceeding the BCA-IMDA Green Mark Platinum standard of 1.3, with sustainability features like solar panels covering 2,400 sq m.
With an estimated cost of $120 million over the next three years, the data centre will expand ST Engineering’s total IT capacity to over 30 megawatts (MW) across four Singapore locations.
ST Engineering’s commercial aerospace (CA) business, one of its three business segments, is also receiving a boost. The CA business has entered into a two-year agreement (with an extension option) to provide module repair offload support for CFM LEAP-1A and LEAP-1B engines for Safran Aircraft Engines (Safran).
See also: Strong order books place ST Engineering in favourable light
ST Engineering is also expanding its Leading Edge Aviation Propulsion (LEAP) engine capabilities, including the addition of LEAP-1A engine testing services expected by 3Q2024. It will also support Safran with LEAP-1B engine maintenance offload services, in addition to existing support for CFM56-5B, CFM56-7B and LEAP-1A engines.
According to Jaiswal, there is growing demand for Maintenance, Repair and Overhaul (MRO) services as the number of LEAP engines — which power the Airbus A320neo and Boeing B737 MAX family of aircraft — grows.
The LEAP engine has a “substantial” backlog of over 10,600 engines, indicating continued growth in the industry, says Jaiswal.
See also: ST Engineering hits 50-month-high following 1QFY2024 revenue jump
ST Engineering will report its 1HFY2024 results on Aug 14 before the market opens. “We remain upbeat on ST Enginering for its defensive dividends and strong profit growth, aided by continued growth and margin improvement in CA and a strong recovery in the urban solutions and satcom (USS) segment,” says Jaiswal.
In a July 22 note, Jaiswal maintains his “buy” call with a higher $5 target price from $4.50 previously. The target price includes a 4% ESG premium based on RHB’s proprietary methodology.
Similarly, CGS International Research analysts Kenneth Tan and Lim Siew Khee have raised their target price to $5 from $4.36 previously, while staying “buy” on ST Engineering.
In a July 19 note, Tan and Lim say investors are “increasingly appreciating” ST Engineering’s double-digit core earnings per share (EPS) growth potential for FY2024-2025. “We believe the outlook for aerospace remains healthy, driven by: increased value/volume of MRO works as older aircraft remain in service for longer periods due to issues with new generation engines and delays in new aircraft deliveries; and improved passenger-to-freighter (PTF) profitability as ST Engineering improves on conversion efficiency.”
For the defence segment, the CGSI analysts think ST Engineering should benefit from multi-year rearmament trends as countries ramp-up defence spending in view of rising global geopolitical uncertainties.
“New growth opportunities could come from large foreign artillery ammunition contracts, which is currently enjoying elevated global demand (particularly in Europe) amid restocking of ammunition stockpiles, in our view.”
For the USS segment, CGSI thinks the pause of New York’s congestion pricing project has little impact at 1% of their FY2024-2026F EPS. “We expect longer-term growth will still come from upgrading of US tolling infrastructure and potential cross-selling of tolling solutions into Southeast Asia.”
As at 11.13am, shares in ST Engineering are trading 3 cents lower, or 0.67% down, at $4.42.
