Analysts are remaining positive on Singapore Technologies Engineering (ST Engineering), where it surprised positively with strong order wins in 4QFY2021 ($3.2 billion) and FY2021 ($11.7 billion), firming up the group’s order book to a record $19.3 billion.

CGS-CIMB Research analysts Lim Siew Khee and Kenneth Tan have kept their “add” rating on ST Engineering, with an increased target price to $4.70 from $4.54.

“ST Engineering’s 2HFY2021 net profit of $274 million (-7% h-o-h, +4% y-o-y) was in line with consensus but slightly below our expectations on lower h-o-h margins from commercial aerospace (higher investment and accelerated hiring) and urban solutions (chip shortage),” say Lim and Tan.

Moreover, ST Engineering also improved transparency with additional disclosures for commercially sensitive contracts clinched in 2021 (implied $3.3 billion in FY2021 and $1.5 billion in FY2020), according to the analysts.

On a whole, the group’s commercial aerospace (CA) segment continued its recovery in 2HFY2021, with revenue up sequentially for maintenance, repair and operations or MRO (+8% h-o-h) and aerostructures (25% h-o-h). “This was mainly due to a ramp-up in passenger-to-freighter (P2F) works and stronger original equipment manufacturing (OEM) deliveries,” say Lim and Tan.

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According to Lim and Tan, ST Engineering is expanding capacity via construction of two additional facilities located in Mobile (US) and Shanghai (China), which should commence in FY22F. “We expect CA’s revenue to grow 13% in FY2022 with P2F deliveries doubling in addition to aviation traffic recovery,” they say. “We expect EBIT margins to gradually improve to 6.8-6.9% in FY2022-FY2023 (FY2021: 6.6%) on stronger operating leverage, although this is still below pre-Covid-19 levels (9-10%) due to ramping up of P2F lines, higher staff and logistics costs as supply chain tightens.”

“Upside could come from scaled up revenue after new P2F lines are normalised,” they add.

DBS Group Research analysts Suvro Sarkar and Jason Sum have also kept their “buy” rating on ST Engineering with an increased target price to $4.70 from $4.60.

“We expect solid [a] 10% compound annual growth rate (CAGR) in net profit over FY2021-FY2023, driven by inorganic growth (TransCore) and recovery in the commercial aerospace segment,” say Sarkar and Sum. “However, the big story is that instead of revenue stagnation (between FY2012-FY2018), growth momentum will continue, built on the solid foundation established since 2018.”

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“With continued investments in research and development (R&D) and strategic acquisitions, ST Engineering remains well on top of crucial global needs of digitalisation, urbanisation, sustainability, and security, driving robust organic growth across segments of 4-5% even further out to 2026,” they add.

Despite the expected increase in gearing however, the analysts envisage limited impact on funding costs.

“We are more conservative on FY2022 earnings compared to consensus (likely related to [the] pace of aerospace recovery), but we are more bullish on the recovery thereafter,” say Sarkar and Sum.

Finally, RHB Research analyst Shekhar Jaiswal has kept his “buy” rating on ST Engineering with an lowered target price of $4.80 from $4.85.

“ST Engineering’s ability to deliver defensive growth, aided by a gradual revival in aerospace business and revised dividend policy, should attract investors,” says Jaiswal. “The group, which expects to complete the earnings accretive Transcore acquisition by end-1QFY2022, is confident of offsetting the withdrawal of government support with cost optimisation and revenue recovery – it has also fixed interest rate for two-thirds of its debt, which should significantly shield earnings from rising interest rates.”

With an aim to reward the shareholders and provide them with more frequent income streams, ST Engineering has decided to declare dividends every quarter instead of twice a year, according to the analyst. “In 2022, the plan is for dividends to be paid four times a year, at 4 cents each time resulting in total dividends of 16 cents vs 15 cents paid in 2021,” says Jaiswal. The group does not expect the revised dividend policy to limit its ability to pursue inorganic growth opportunities.

At 10.57am, shares in ST Engineering are trading at 4 cents lower or 1.01% down at $3.91.

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