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A buying opportunity for ST Eng as it gets on track for further growth with rail contract

Lim Hui Jie
Lim Hui Jie9/6/2022 03:47 PM GMT+08  • 3 min read
A buying opportunity for ST Eng as it gets on track for further growth with rail contract
Find out why the analysts from RHB and CGS-CIMB think that it’s a good time to buy ST Engineering.
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Analysts from RHB Group Research and CGS-CIMB have maintained their “buy” and “add” calls and unchanged target prices on Singapore Technologies Engineering (ST Engineering), with RHB handing the stock a target price of $4.60 and CGS-CIMB putting their target price at $4.53.

RHB analyst Shekar Jasiwal says ST Engineering’s recent share price correction is a “buying opportunity.” Based on his estimates, ST Engineering’s is now trading at 18.2x its FY2023 earnings per share (EPS), which is below the six-year average P/E of 19.8x.

He is of the view that the current price correction was caused by lower than expected earnings for the 1HFY2022 ended June, as well as concerns around its growing debt levels in a rising interest rate environment.

However, the analyst sees “no changes in ST Engineering’s growth outlook and maintains that it should deliver defensive growth beyond 2022, aided by a revival in global aviation traffic, gains from growing demand for smart-city solutions, and rising global defence spending.”

Furthermore, Jasiwal expects the company’s distribution per share (DPS) of 16 cents to remain steady and forecasts an 8% core profit compounded annual growth rate (CAGR) from FY2021-FY2024.

Most notably, the recent $1.4 billion contract win by ST Engineering’s Urban Solutions & Satellite Communications (USS) segment in Taiwan is a “strong order win”. For context, the USS business has been reporting an average quarterly order win of $340 million since 1QFY2021.

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The latest contract win will see ST Engineering providing turnkey rail services, including rail electronics solutions as well as above-ground train depot design, construction and equipment fit-out, for the new Kaohsiung MRT Yellow Line.

Separately, CGS-CIMB analysts Lim Siew Kee and Kenneth Tan also broadly agree with Jasiwal, noting the company’s strong quarterly order wins and record order book.

ST Engineering reported its highest order book of $22.2 billion, excluding the Kaosiung contract, which implies a book-to-bill ratio of 2.7 years. Around $4.6 billion of this order book is expected to be delivered in 2HFY2022, representing 100% of their 2HFY2022 revenue estimates.

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Pointing at the Kaosiung contract, Lim and Tan say that it is the largest-ever rail project win for ST Engineering, and they see the potential for further smart mobility wins, given that the large contract size could increase global awareness of ST Engineering’s smart mobility solutions, and it could see cross-selling opportunities via TransCore.

Several notable rail contracts won by ST Engineering in recent years include the Kaohsiung MRT Red Line Extension ($445 million) and North-South and East-West Lines in Singapore ($180 million).

As for its share price weakness, Lim and Tan think that the market may have underappreciated ST Engineering’s efforts to optimise costs to close the gap from the loss of Covid-19 related grants and tackle inflation pressures.

They note that the pension restructuring (resulting in a $72 million gain) is not mandatory, but on a “voluntary basis” by ST Engineering. As such, they believe that ST Engineering’s efforts to optimise costs continue to ensure margin improvement while chasing topline growth.

As of 2.59 pm, shares of ST Engineering were trading at $3.78, with a FY2022 P/B ratio of 4.8 and dividend yield of 4.7% according to RHB’s estimates.

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