RHB Bank Singapore analyst Shekhar Jaiswal has maintained his “buy” call on Singapore Technologies Engineering S63 (ST Engineering) while upgrading his target price from $5 to $5.32, representing a 14.5% increase.
ST Engineering’s share price has outperformed the Straits Times Index (STI) and Jaiswal expects this to continue as ST Engineering remains well positioned to deliver a 15% compounded annual growth rate (CAGR) on its profit and steady dividends between FY2023 to FY2026.
Jaiswal notes that this growth is supported by a strong demand for aviation maintenance, repair and overhaul (MRO) services and possible recovery in the Urban Solution and Satcom (USS) segment. The fall in interest rate provides further earning tailwinds as approximately 39% of its debt is exposed to floating interest rates, Jaiswal adds.
Jaiswal expects that the strong earning growths reported by ST Engineering in 1HFY2024 will continue given continuing demand for aviation MRO work, boosting the commercial aerospace business. As a result of strike action, Boeing’s operations have been affected and Jaiswal is of the opinion that this could worsen the shortage of jetliners globally, forcing airlines to use older aircrafts for longer. In turn, this leads to more work for both airframe and engine MRO service providers.
Additionally, Jaiswal predicts higher aircraft engine nacelle deliveries, with Airbus expecting its A320 production rate to increase beyond the 45 aircraft per month deliveries in 2023. This would likely result in ST Engineering’s passenger-to-freight (PTF) conversions reaching better margins in 2HFY2024, Jaiswal adds.
Despite the USS numbers performing below expectations in 1HFY2024, Jaiswal maintains that ST Engineering’s focus on improving processes and optimising costs is likely to boost earnings before interests and taxes (ebit). Jaiswal also expects sustained growth in the Defence and Public (DPS) segment as the group continues to deliver on its orderbook.
Further to the report, Jaiswal notes ST Engineering’s potential for lower interest costs.
In the 1HFY2024 results announcement, ST Engineering’s had stated that it estimates the 2024 weighted average borrowing costs at 3.7%, below his estimate of 3.5%, assuming there were no US Federal Reserve (US Fed) rate cuts in 2024. Amidst his expectations of two rate cuts in 2HFY2024, and further rate cuts in 2025, Jaiswal sees a possibility of lower interest costs in 2025, with the potential to further increase earnings. This is because 39% of ST Engineering’s debt is subject to a floating interest rate.
Additionally, ST Engineering reported a record order backlog of $27.9 billion as of end June, implying a book-to-bill ratio of 2.8 years. ST Engineering estimates that $4.9 billion of the orders will be delivered in 2HFY2024, accounting for around 90% of our 2HFY2024 revenue estimate, Jaiswal says.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
The target price is derived using an average of price-to-earnings ratio (P/E), price-to-book value ratio (P/BV), EV/EBITDA and discounted cash flow (DCF).
Shares in ST Engineering closed 3 cents higher or 0.64% up at $4.72 on Sept 23.
