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DBS lifts ST Engineering’s TP to $4.60 on upswing in growth trajectory

Chloe Lim
Chloe Lim • 3 min read
DBS lifts ST Engineering’s TP to $4.60 on upswing in growth trajectory
ST Engineering to experience upswing in growth trajectory with increased TP to $4.60: DBS Group Research
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DBS Group Research analysts Suvro Sarkar and Jason Sum have maintained a “buy” rating on ST Engineering with a slightly higher target price of $4.60. At its current price, the counter offers a “decent” dividend yield of 3.8%. To Sarkar and Sum, the counter also has the potential to ride on stronger growth going forward.

ST Engineering has set a target for their annual revenue to grow at 2-3 times GDP growth rate (compared to base year of FY2020) to surpass $11 billion in FY2026, as it goes about capturing new opportunities across the board in smart city projects, defence and aerospace contracts.

From this $11 billion revenue target for the group, the commercial aerospace segment is expected to achieve more than $3.5 billion in revenue, while smart city revenue is anticipated to more than double to $3.5 billion.

See: ST Engineering eyes FY2026 revenue target of more than $11 bil

The revenue target of $11 billion by FY2026 represents a 7% compound annual growth rate (CAGR) in revenue compared to FY20 levels, and a lower 5% CAGR if we compare to pre-crisis (FY2019) levels. ST Engineering had recorded a revenue of $7.2 billion in FY2020, down 9% from FY2019 (pre-Covid-19) levels and hence growth rates in the near term will be off a lower-than-usual base, and hence higher, according to the analysts.

Additionally, contract flows have been positive year-to-date (y-t-d) in 2021, say Sarkar and Sum. “The order book continues to breach record levels quarter after quarter, and at $18.2 billion as of end-3Q2021, it is much higher than pre-Covid-19 levels,” say the analysts. “9M21 order wins stand close to $5.2 billion and the orderbook increased to an all-time high of $18.2 billion at end-September 2021, up from $15.7 billion as of end-March 2021 and $15.3 billion as of end-FY2020,” they added.

See also: UOBKH keeps ‘buy’ and TP unchanged on BRC Asia, sees bullish medium-term outlook

ST Engineering also announced contracts worth a total of $5.2billion y-t-d in FY2021, which is a significantly higher run rate than the FY2020 trends, despite the slow recovery in the commercial aerospace sector.

In 2018, ST Engineering had announced its intentions to focus on growing its smart city business and pursue opportunities in the international defence business, apart from strengthening the core businesses.

The analysts said that ST Engineering’s prioritization of the crucial global needs of digitalisation, urbanisation, sustainability and security stands “to drive robust organic growth across segments of at least 4-5% even further out in this decade to 2026.”

See also: CGS International keeps ‘add’ call on UOB with unchanged TP following the bank’s recent visit to KL

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However, Sarkar and Sum also noted that key risks included slower than-expected demand recovery in international air travel that could pose downside risk to earnings and valuations.

As at 12.53pm, shares in ST Engineering are up 1 cent or 0.25% higher at $3.96.

Photo: Albert Chua/The Edge Singapore

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