Although ST Engineering’s share price “has been a bit soft” following the release of its results for 3QFY2024 ended Sept 30, RHB Bank Singapore analyst Shekhar Jaiswal remains upbeat on the outlook of the integrated engineering group.
Shares in ST Engineering have fallen some 3.8% over the past month.
ST Engineering reported 14% higher revenue y-o-y to $8.3 billion for its 9MFY2024 ended Sept 30. The jump was led by "significant" 3QFY2024 growth in its Defence and Public Security (DPS) segment. In 9MFY2024, this market segment recorded 18% y-o-y higher revenue, reaching $3.6 billion.
ST Engineering's 4QFY2024 order delivery guidance of $2.6 billion equalled RHB’s revenue estimate for the quarter. Jaiswal raised his FY2024 topline estimate by 3% to account for revenue from within-quarter business.
Meanwhile, he raised his FY2025-FY2026 revenue forecast by 2% each amid a stronger outlook for the DPS and Commercial Aerospace (CA) segments, with expectations of a more gradual margin recovery for the Urban Solutions & Satcom (USS) segment. “We lower FY2024-FY2025 profit by 5% and 3% amid slower improvements in USS margins.”
In a Nov 28 note, Jaiswal cites ST Engineering’s earnings improvement trajectory, where profit growth will continue to be supported by its CA and DPS segments. “We still expect ST Engineering to deliver 15% profit CAGR in FY2023-FY2026.”
See also: ST Engineering records 9MFY2024 revenue of $8.3 billion, up 14% y-o-y
For now, Jaiswal is maintaining “buy” on ST Engineering with a lower target price of $5.20 from $5.32 previously. The target price includes a 4% ESG premium, calculated based on RHB’s proprietary methodology.
Key changes
For the CA segment, although ST Engineering has maintained its mid-single-digit ebit margin by the end of 2024 and $700 million revenue guidance by 2026 for the passenger-to-freighter (PTF) business, the reduced PTF volume in the near term — amid lower availability of feedstock — could slow the ramp-up in margin improvement.
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The more significant changes to Jaiswal’s FY2024 profit estimates are from reducing the margin for the USS segment, “which remains soft amid slower-than-expected improvements in the Satcom business”.
“While we remain positive on ST Engineering being able to register margin improvement for the USS segment, we are now a bit more cautious about the rate of this improvement in FY2025,” writes Jaiswal.
According to Jaiswal, ST Engineering’s CA segment will be aided by continued strong demand for aviation maintenance, repair and operations (MRO) work. “This is evident from ST Engineering’s hangars operating at 90% utilisation levels and repurposing some of its PTF capacity to meet the increased MRO demands.”
STE’s hangar capacity will be increased by 20% in FY2024 and 30% in FY2026 as compared to pre-pandemic levels, notes the analyst. “The sustained delivery of defence contracts should support growth for the DPS segment.”
ST Engineering's order backlog of $26.9 billion continues to provide 2.5 years of revenue visibility, says Jaiswal. “We have now incorporated a 30 basis point decline in interest costs for FY2025.”
As at 4.55pm, shares in ST Engineering are trading 3 cents higher, or 0.67% up, at $4.49.
