MAYBANK Securities on Tuesday (May 31) initiated coverage on ST Engineering (ST Engg) with a &ldquo buy&rdquo call and a target price of S$4.75. 

 

The research team expects the recovering aerospace landscape, as well as the company&rsquo s recent acquisition and contract wins, to provide revenue visibility for the company. 

 

The target price implies a potential upside of 14.5 per cent from Tuesday&rsquo s trading price of S$4.15 as at 2.52 pm. The counter was up S$0.09 or 2.2 per cent at the time.  

 

The research team estimates that demand for urban and satellite communications solutions could drive a compound annual growth rate of 9.9 per cent from FY2021 to FY2024. New drivers include smart-city and information and communications technology solutions. 

 

Maybank said that ST Engg&rsquo s acquisition of TransCore has growth potential in smart city solutions. Rising defence spending may also raise international sales &ldquo at a robust pace&rdquo . 

 

Noting that the aerospace maintenance, repair and overhaul sector is witnessing some recovery as international borders open, Maybank analyst Kelvin Tan said that rising demand for freighter aircraft should see an uptick in passenger-to-freight conversion contracts. 

 

ST Engg&rsquo s significant contract wins and record-breaking FY2021 order book of S$19.3 billion will also provide good revenue visibility, Maybank said, adding that this will also promise a sustainable dividend yield on 2.5 per cent. 

 

The group&rsquo s strategy to better integrate ST Engg&rsquo s various divisions could also be materially positive. Tan foresees pre-tax profit margin to increase from 9 per cent in FY2021 to 10.2 per cent by FY2024, mostly on efficiencies in smart cities initiatives coupled with a strong order book growth of 15 per cent year on year. 

 

&ldquo We also see a potential surprise to the upside from revenue (cross-selling) and cost (central procurement, systems standardisation) synergies in the coming 2-3 years,&rdquo Tan said. 

 

That being said, Maybank&rsquo s research team is &ldquo prudentily below consensus&rdquo when it comes to its estimates on ST Engg&rsquo s FY2022-24 net profit. This is due to its concerns on a slower reopening of Asia&rsquo s aviation sector and the global chip shortage, which could impact the sale of smart-city solutions.

ST Engineering on Friday morning (May 13) reported revenue of $2 billion for the first quarter ended March 2022, up 13 per cent year on year and returning to pre-Covid-19 levels.

 

Its board has approved an interim dividend of four cents per share, which will be paid out on June 7, 2022.

 

In a business update, the defence and engineering group said its topline growth came as revenue in all business segments booked improvements over the quarter.

 

Commercial aerospace saw a 22 per cent year-on-year increase in revenue to $674 million from $552 million in the first quarter of 2021, attributed to the gradual recovery in maintenance, repair and operations demand as well as the reopening of borders.

 

Signalling strong passenger-to-freighter demand, the group said its A320/A321P2F and A330P2F aircraft have been booked through 2025 and 2026 respectively.

 

Revenue from the urban solutions and satellite communications segment rose 12 per cent to $297 million from $264 million the previous year due to higher Smart City project deliveries. The revenue figures for both comparative periods were notably higher than the $236 million in revenue for the first quarter of 2020, before Covid-19.

 

Defence and public security revenue rose 9 per cent year-on-year to $1.1 billion to exceed pre-pandemic levels, which the group said was due to strong growth from its digital systems and cyber business.

 

A total of $2.4 billion worth of new contracts were secured over the first quarter, with defence and public security registering the highest value of deals at $1.3 billion. Commercial aerospace saw $900 million in contract wins, while urban solutions and satellite communications won $200 million worth of contracts.

 

ST Engineering' s order book stood at $21.3 billion as at end-March, including $1.6 billion from United States-based transport technology company TransCore, whose acquisition was completed on March 17, 2022.

 

The TransCore acquisition is estimated to bear a weighted average financing cost of about 1.8 per cent for the first year. Gains of U$32 million from its recent financing exercise related to the acquisition will be held in the group' s balance sheet reserves to reduce yields from future bond issues.

 

S& P Global Ratings has downgraded the credit rating of Singapore Technologies Engineering (ST Engineering) to " AA+" from " AAA" , as the company would be facing elevated debt levels for at least the next 2 to 3 years after the TransCore deal.

 

The S$3.6 billion acquisition of 2 transport solutions firms in the US, which was first announced in October last year and completed on Mar 18 this year, will almost triple ST Engineering' s debt to S$5.3 billion in 2022, from S$2.1 billion as at the end of last year, said S& P analysts Pauline Tang and Minh Hoang in a research report on Wednesday (Mar 23).

 

" (ST Engineering' s) sizeable debt burden will weigh on its balance sheet over the next 1 to 2 years," the credit ratings agency added.

 

Based on their forecasts, its debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio, which measures a company' s financial leverage and its ability to pay off its debt, is estimated to increase to 4 in 2022.

 

The company has become more growth-oriented, with its debt-to-Ebitda increasing steadily over the last few years. It went up to 2 in 2019 from 1 the year before, after it acquired nacelle manufacturing and satellite communications.

 

While Tang and Hoang said that the engineering and aerospace giant' s takeover of TransCore Partners and TLP Holdings does have the potential to contribute to higher earnings, the benefits from possible business synergies will take some time to materialise.

 

It noted that the 2 companies, collectively known as TransCore, specialise in toll collection systems among several other products predominantly in the US, where ST Engineering : S63 +0.24% does not have a similar presence. The addition of TransCore' s portfolio will provide ST Engineering a new product offering in the smart mobility segment, as well as some geographical diversification for the company.

 

Nonetheless, the company' s ability to bid for sizeable overseas contracts is limited in the absence of a comprehensive enough suite of products to be able to provide full in-house manufacturing and engineering, noted Tang and Hoang.

 

" It will take some time for ST Engineering to build its expertise and recognition to match those of sizeable peers," they added.

 

The slow recovery in the aviation industry, which had been beaten down in the last 2 years due to the Covid-19 pandemic, would also hinder any meaningful reduction of debt, noted Tang and Hoang.

 

" We believe earnings growth, rather than proactive debt reduction, is likely to facilitate any deleveraging plan. However, the pace of earnings growth is unlikely to offset debts incurred from the acquisition," they added.

 

Tang and Hoang estimate that TransCore will likely contribute between S$200 million and S$250 million in ST Engineering' s earnings over the next 1 to 2 years, paling in comparison to the S$3.6 billion debt the firm had taken on to fund the acquisition.

 

Even though ST Engineering reported a record high of orders amounting to S$19.3 billion in 2021, Tang and Hoang expect revenue generation to be gradual and span over several years.

 

They estimate that the company' s annual Ebitda will come in at between S$1.3 billion and S$1.5 billion in 2022 and 2023, including contributions from TransCore. This would mean an annual growth of between 10 and 20 per cent, compared with 2021.

 

Despite the downgrade, Tang and Hoang' s outlook on ST Engineering remains stable, as they expect the company to still generate steady cash flow and maintain its dominant and critical role in Singapore' s defence industry.

MAINBOARD-LISTED defence and engineering group Singapore Technologies Engineering (ST Engineering) ST Engineering: S63 +2.29% has gained about 3.4 per cent in its share price this week, with analysts pointing to geopolitical tensions, the stock' s safe-haven nature and the group' s earnings prospects as factors propelling the ascent.

 

DBS equity research analyst Jason Sum said geopolitical tensions in Europe have sparked safety concerns among many nations and this will likely translate into a notable increase in defence spending.

 

" For example, Germany has announced that it plans to raise defence spending considerably in response to Russia' s aggression - the country will inject 100 billion euros (S$150 billion) into a special fund to modernise its army. The French president also recently pledged to increase France' s defence spending. Additionally, smaller countries may look to ramp up defence spending as well. These developments do bode well for ST Engineering' s defence business," Sum elaborated.

 

CGS-CIMB' s head of Singapore research Lim Siew Khee has observed that ST Engineering' s American peer Lockheed Martin' s stock price has also risen by nearly 10 per cent in the past 5 days.

 

She added that a diversified group with an international geographical footprint such as ST Engineering would tend to do well in the present choppy market. The recent robust earnings ST Engineering reported have probably given its share price a boost as well.

 

ST Engineering posted 9.3 per cent higher net profit at S$570.5 million for FY2021 as revenue for the year climbed 7.5 per cent to S$7.69 billion versus a year ago. Order book stood at S$19.3 billion as at end-2021, with S$6.6 billion to be delivered in 2022.

 

Indeed, RHB Bank Singapore' s head of equity research Shekhar Jaiswal believes that investors may have started to appreciate ST Engineering' s strengths as he noted it offers a profit compound annual growth rate of about 8 per cent. " Its record high order book that offers close to 2.5 years of revenue visibility should give investors the confidence of a sustained rise in earnings."

 

He also said that ST Engineering might have been the only blue chip company listed on the Singapore Exchange that did not cut dividends during the pandemic years. And ST Engineering will be increasing its total dividend payout to S$0.16 in 2022 from S$0.15 despite leveraging up to make earnings-accretive acquisitions.

 

" Add to all of this, is the fact that (about) 30 per cent of ST Engineering' s revenue is derived from defence and related businesses," Jaiswal said.

FOR the 6 months in the financial year ended Dec 31, 2021, Singapore Technologies Engineering (ST Engineering) ST Engineering: S63 -1.82% reported a net profit of S$274.4 million, inching up 3.8 per cent year on year from S$264.4 million.

 

In its financial results on Friday (Feb 25), the engineering company said that due to a " significant" reduction of non-taxable government support in H2 FY2021, its H2 net profit growth was higher than its profit before tax growth for the same period of 20.1 per cent on-year to S$297.8 million from S$248 million.

 

Revenue for the second half of FY2021 was S$4.04 billion, a 12.7 per cent increase from S$3.59 billion a year ago, as all 3 business segments posted higher revenue year on year.

 

The best performer for the half was commercial aerospace, which had a H2 revenue increase of 25 per cent to S$1.33 billion from S$1.07 billion, due to significant cost savings and partial business recovery that more than offset the reduction in government support of S$51 million.

 

The board has recommended a final dividend of S$0.10 per share, the same as the year-ago period. Together with an interim dividend of S$0.05 per share, the full year' s total dividend will be S$0.15 per share, also the same as FY2020.

 

Going forward, the board has approved a dividend policy to declare dividends every quarter instead of twice a year to provide shareholders more frequent income streams, with FY2022 dividends planned to be S$0.04 per share each quarter, resulting in a total FY2022 dividend of S$0.16.

For the full-year FY2021, net profit increased 9.3 per cent year on year to S$570.5 million from S$521.8 million.

 

This translated to an earnings per share increase for FY2021 to S$0.1830 from S$0.1674.

 

Revenue for the year also climbed 7.5 per cent to S$7.69 billion, from S$7.16 billion in FY2020.

 

In its outlook, the group said it expects the delivery of its strong order book, its various business initiatives and further business recovery to position it well for 2022 business performance.

 

Vincent Chong, group president and chief executive officer of ST Engineering, said: " The proposed TransCore acquisition demonstrates our readiness to seize growth opportunities to emerge stronger post pandemic. We can look to the future with confidence as our order book of S$19.3 billion is very robust."

 

The TransCore acquisition refers to a US$2.68 billion deal cut with an indirect wholly-owned subsidiary of American industrial company Roper Technologies for all ownership interests in TransCore Partners, a US-based transport technology company, that was announced in October 2021.

 

Chong added: " Moreover, our focus on the effective execution of our long-term strategy and our commitment to invest across the business cycles will put us in good stead to achieve our 2026 targets as communicated on our Investor Day."