RHB Bank Singapore' s Shekhar Jaiswal continues to call ST Engineering S63 -0.55% a " buy" , citing the defence and engineering conglomerate' s combination of defensive yield and strong earnings growth, which makes this a " special investment opportunity" .

 

However, because of revised financing costs assumptions, which will therefore weigh down earnings forecast slightly by 2%, Jaiswal, in his May 9 note, has trimmed his target price from $4.10 to $4.05.

 

According to Jaiswal, ST Engineering will see potential upside from its commercial aerospace segment, on the back of a recovery in global aviation traffic.

 

Its urban solutions segment will see " strong growth" from Transcore, its US-based traffic management systems unit.

 

In addition, the defence segment will benefit from higher spending in Singapore and in the US.

 

Jaiswal acknowledges that investors are worried about the company' s debt load, incurred to fund the acquisition of Transcore.

 

Nonetheless, he believes the concerns should be allayed by the company' s capacity to produce a significant free cash flow.

 

He expects a " gradual" drop in the company' s gearing from the current FY2023 to FY2025.

 

" We think that Moody' s recent reinforcement of its AAA issuer rating &ndash the highest rating level offered by the credit rating agency &ndash should allay investor worries about ST Engineering' s elevated debt levels," writes Jaiswal.

 

SINGAPORE&rsquo S Land Transport Authority (LTA) awarded a S$200 million contract to ST Engineering : S63 -0.28%&rsquo s Urban Solutions to work on two key systems for the Cross Island Line (CRL).

 

On Friday (Apr 14), LTA announced that Urban Solutions will design and build the integrated supervisory control system for the CRL. It will also do so for the line&rsquo s communications system, which comprises various sub-systems such as the communication backbone network and video surveillance.

 

ST Engineering is expected to start work in the second quarter of 2023.

 

The authority said it awarded the contract to ST Engineering for its cost competitiveness, expertise and track record, as well as the quality of the solutions it proposed.

 

Urban Solutions previously completed the communications systems for four other railway lines, as well as the integrated supervisory control systems for the Circle Line and Downtown Line.

 

LTA also awarded a S$450 million contract to Siemens Mobility to build the CRL&rsquo s signalling and platform screen door systems.

 

The CRL is Singapore&rsquo s eighth Mass Rapid Transit line. It will serve existing and future developments in the eastern, north-eastern and western parts of Singapore, linking major hubs such as the Jurong Lake District, Punggol Digital District and Changi.

For years, Singapore Technologies Engineering (ST Engineering) S63 -0.27% &mdash which started as an arms contractor for the Singapore military &mdash has been actively growing its commercial business across the world for a more diversified revenue base.

 

Yet, it is this long-time customer back home who will, now and then, help lift the company&rsquo s earnings with yet another big contract.

 

On March 27, ST Engineering announced that the Ministry of Defence had tasked the company to help build a fleet of six warships. As per normal practice, neither ST Engineering nor the government would disclose the value of such contracts.

 

Specifically, ST Engineering&rsquo s subsidiary &mdash ST Marine &mdash is to help design and build six so-called Multi-Role Combat Vessels (MRCVs) for the Republic of Singapore Navy. The vessels will be delivered progressively from 2028.

 

ST Marine will also provide logistics support when the MRCVs are operating. The new MRCVs, to be fitted with advanced digital capabilities, will replace the ageing Victory-class Missile Corvettes (MCVs), in service since 1989.

 

CGS-CIMB analysts Lim Siew Khee and Kenneth Tan, in their March 27 note, estimate ST Marine&rsquo s share of contract price per vessel to be between $250 million and $300 million. This means the contract will likely be valued at between $1.5 billion and $1.8 billion, potentially lifting ST Engineering&rsquo s order book to $25 million.

 

The CGS-CIMB analysts base their estimate against ST Marine&rsquo s previous patrol vessels contract awarded in 2012 by Oman Navy at $880 million, or $220 million each. &ldquo We also draw reference from the Abu Dhabi Ship Building contract from the UAE Ministry of Defence in May 2021 to build four Falaj 3-class Offshore Patrol Vessels at US$950 million ($1.2 billion each).&rdquo

 

&lsquo Good progress&rsquo

 

The navy contract aside, &ldquo all segments&rdquo of ST Engineering are making &ldquo good progress,&rdquo say Lim and Tan, who are keeping their &ldquo add&rdquo call on the stock, along with an unchanged target price of $4.

 

On March 17, ST Engineering announced that its urban solutions and satellite communications business unit won a $430 million turnkey rail service contract from the Kaohsiung City Mass Rapid Transit Bureau for the new Kaohsiung MRT Red Line South Extension.

 

The contract will start in mid-2023 for nine years.

 

This is in addition to its $1.4 billion turnkey contract secured in 2022 for the Kaohsiung MRT Yellow Line.

 

The contract started in 2022 and will last for 10 years.

 

In his report, Suvro Sarkar of DBS Group Research notes that ST Engineering has a long track record of building vessels for the Singapore navy and other customers using its yards here.

 

In contrast, ST Engineering yards in the US were running at a loss but were sold last November to Bollinger Shipyards Lockport for around $21 million. These US entities had bled ST Engineering US$256 million between FY2017 and FY2021.

 

With the MRCVs to be built in Singapore, there will be minimal execution issues, says Sarkar.

 

Relative to his CGS-CIMB counterparts, Sarkar has a more bullish estimate of the contract value, suggesting a range of $3.3 to $4 billion, which, if so, will bring ST Engineering&rsquo s order book to a new peak of more than $2.6 billion.

 

He estimates that ST Engineering will start to enjoy meaningful earnings contributions at a &ldquo conservative margin&rdquo of 5% to 6% from this contract from FY2025 onwards, in the range of $180 million to $240 million in total over the six years or so, or, between $30 million and $40 million a year, which implies an accretion of 5.5% to 7.5% compared to FY2022 earnings.

 

&ldquo If ST Engineering can execute better and achieve net margins of 10% on the contract, the accretion will be even more material at 10% to 12% of current group earnings, which would be a very healthy outcome,&rdquo says Sarkar, who is keeping his &ldquo buy&rdquo call and $4.20 target price.

 

Meanwhile, RHB Group Research analyst Shekhar Jaiswal maintains a &ldquo buy&rdquo and a target price of $4.10, higher than CGS-CIMB&rsquo s fair value. However, based on RHB&rsquo s methodology, Jaiswal&rsquo s target price includes an 8% ESG premium over its original $3.80 fair value.

 

&ldquo We see ST Engineering as a unique play with a defensive yield and upside from strong growth in 2023 to 2025 aided by a revival in global aviation traffic boosting its commercial aerospace segment, the USS segment seeing strong growth amid contributions from the TransCore acquisition, and the Defence Public Security (DPS) segment witnessing benefits from rising defence spending in Singapore,&rdquo writes Jaiswal in his March 28 note.

 

He adds that ST Engineering&rsquo s ability to generate strong free cash flow should alleviate concerns about its elevated debt levels. &ldquo We expect the net debt to equity ratio to gradually decline from 2023 to 2025.&rdquo ST Engineering shares closed at $3.64 on March 30, up 1 cent following the announcement of the MRCV contract wins on March 27.

 

FOLLOWING the contract win by a unit of ST Engineering : S63 +0.83% to construct six military vessels for the Singapore Navy, GlobalData estimated this would bring in US$1.2 billion in revenue for the company, with each vessel valued at US$200 million.

 

The announcement by ST Engineering, which was posted on the Singapore Exchange on Mon (Mar 27), stated that the six vessels would be delivered progressively from 2028.

 

The contract was not expected to have any material impact on either the net tangible assets per share or the earnings per share of the company for the current financial year, it added.

 

In addition to bolstering Singapore&rsquo s navy, the programme to build these vessels will also help the Republic&rsquo s defence sector and gain potential for exports to numerous Asia-Pacific countries, said Akash Pratim Debbarma, defense analyst at GlobalData.

 

ST Engineering said the vessels, known as Multi-Role Combat Vessels (MRCVs), are designed to function as a mothership and can operate a range of manned and unmanned systems in a flexible, intuitive and integrated manner.

 

&ldquo The new MRCV will harness the &lsquo multiplier effect&rsquo of digital technologies, to meet the Republic of Singapore Navy&rsquo s requirements for faster, more efficient operations,&rdquo said Ng Sing Chan, president of marine business at ST Engineering &ndash the unit which won the contract awarded by the Ministry of Defence.

&ldquo This contract affirms our capabilities to design and build large and complex naval vessels,&rdquo he added.

 

ST Engineering (STE) S63 -0.28% has sizeable defence contracts in the pipeline, with a Ministry of Defence (MINDEF) contract announced March 27 worth up to $1.8 billion, according to estimates by CGS-CIMB Research analysts Lim Siew Khee and Kenneth Tan.

 

In a March 27 note, Lim and Tan maintain &ldquo add&rdquo on STE with an unchanged target price of $4.00, which represents an upside of 10.2% against its last traded price of $3.63 on March 27.

 

STE&rsquo s subsidiary, ST Marine, has been awarded a contract by Singapore&rsquo s MINDEF for the detailed design and construction of six Multi-Role Combat Vessels (MRCVs) for the Republic of Singapore Navy (RSN). The vessels will be delivered progressively from 2028.

 

While no amount was disclosed, CGS-CIMB analysts estimate ST Marine&rsquo s share of contract price per vessel to be between $250 million and $300 million.

 

&ldquo This is benchmarked against ST Marine&rsquo s previous patrol vessels contract awarded in 2012 by Oman Navy at $880 million, or $220 million each,&rdquo say the analysts. &ldquo We also draw reference from the Abu Dhabi Ship Building contract from the UAE Ministry of Defence (MOD) in May 2021 to build four Falaj 3-class Offshore Patrol Vessels at US$950 million ($320 million each).&rdquo

 

ST Marine will also design and provide integrated logistics support engineering to support and maintain operational readiness during the lifespan of the MRCVs.

 

Lim and Tan also note that Singapore&rsquo s Defence Science and Technology Agency (DSTA) and Sweden&rsquo s Saab also signed a memorandum of understanding (MOU) last week to codevelop and design the MRCV, harnessing technologies such as AI and data analytics to realise the MRCV as a highly digital ship.

 

According to DSTA, the new MRCVs will replace the ageing Victory-class Missile Corvettes (MCVs), which have been in service since 1989. The MCVs formed the backbone of RSN&rsquo s strike and safeguard Singapore&rsquo s vital sea lines of communication.

 

' Good progress'

 

Lim and Tan notes that &ldquo all segments&rdquo of STE are making &ldquo good progress&rdquo .

 

On March 17, STE announced that its Urban Solution (USS) business won a turnkey rail service contract worth over $430 million from the Kaohsiung City Mass Rapid Transit Bureau for the new Kaohsiung MRT Red Line South Extension, as part of a larger consortium contractor, Hyundai Rotem.

 

The contract will start from mid-2023 for nine years.

 

This is in addition to its $1.4 billion turnkey contract secured in 2022 for the Kaohsiung MRT Yellow Line.

 

The contract started in 2022 and will last for 10 years.

 

On March 22, CFM International and STE&rsquo s Commercial Aerospace business signed a CFM Branded Service Agreement (CBSA) for LEAP-1A and LEAP-1B engines.

 

STE is the first Maintenance, Repair & Overhaul (MRO) provider in Asia to offer a full range of LEAP-1A and LEAP-1B services, notes Lim and Tan. &ldquo The CBSA expands STE&rsquo s capabilities as it has been a LEAP MRO network provider since 2020 for quick-turn services for the engines. Currently, more than 5,000 LEAP engines, powering A320neo and Bowing 737-MAX, have been delivered worldwide with 10,000 engines in the backlog.&rdquo

 

As such, Lim and Tan estimate STE&rsquo s order book to reach $25 billion, compared to $23 billion as at end-December 2022, with the above MRCVs and USS Kaohsiung contracts.

 

In his separate but related report, Suvro Sarkar of DBS Group Research notes that ST Engineering has a long track record of building vessels for the Singapore navy using its yards here.

 

In contrast, ST Engineering yards in the US were running at a loss, but were sold recently.

 

As such, Sarkar believes there should be scant execution issues in delivering this order.

 

He estimates that ST Engineering will start to enjoy meaningful earnings contributions from this contract from FY2025 onwards, in the range of $180 million to $240 million in total over the six years or so, or, between $30 and $40 million a year, which will imply an accretion of 5.5%-7.5% compared to FY22 earnings.

 

Sarkar is assuming a " conservative" margin of 5 to 6%.

 

" If STE is able to execute better and achieve net margins of 10% on the contract, the accretion will be even more material at 10-12% of current group earnings, which would be a very healthy outcome," says Sarkar, who is keeping his " buy" call and $4.20 target price.