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DBS positive on ST Engineering’s growth prospects despite interest rate and recession risks

Lim Hui Jie
Lim Hui Jie12/6/2022 01:33 PM GMT+08  • 3 min read
DBS positive on ST Engineering’s growth prospects despite interest rate and recession risks
The analysts think that the negatives for ST Engineering are priced in already. Photo credit: The Edge Singapore/Albert Chua
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DBS Group Research has maintained its “buy” rating on Singapore Technologies Engineering (ST Engineering), but with a lowered target price of $4.10 from $4.70, following lower earnings seen for FY2022 and FY2023 because of higher financing costs.

In their Dec 5 report, analysts Suvro Sarkar and Jason Sum say the company is likely to suffer from a 5-6% earnings drop this year and next with the higher financing costs, mainly from serving debt taken to fund the US$2.7 billion acquisition of Transcore.

With rates rising, ST Engineering is raising its proportion of fixed-rate debt to about 65% to 70% from the current level of 54%. This will be done by terming $700 million to $1 billion worth of floating-rate commercial papers through fixed coupon bonds/loans, the analysts write.

Based on the company’s recent debt-raising exercise of US$700 million at 3.375% and US$300 million at 3.75% notes raised in April, as well as new bonds to be issued, the DBS analysts estimate that ST Engineering’s cost of debt will rise to 3.5%-4% over the next two years, up from 2% previously.

Despite the prospects of higher financing costs, Sarkar and Sum believe that ST Engineering’s “growth trajectory remains robust”, with a double-digit CAGR in earnings between FY2022 to FY2024, driven by inorganic growth from the TransCore acquisition and recovery in the commercial aerospace segment.

“With continued investments in R&D and strategic acquisitions, ST Engineering remains well on top of the crucial global needs of digitalisation, urbanisation, sustainability, and security,” the analysts point out.

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These will drive robust organic growth of 4% to 5% across all its segments, even going into 2026.

They envision a strong ramp-up in passenger to freighter conversion contracts for its commercial aerospace segment. They also expect better traction in the broader smart city space, which includes specific segments ranging from smart mobility, smart environment, and smart security projects in its urban security.

Other businesses with growth potential include the satellite communications segment, plus the digital businesses including cloud, AI analytics, and cybersecurity; and international defence contracts.

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Sarkar and Sum note that the company’s record order backlog of $23.1 billion (as of end 3QFY2022 in September) also underpins its earnings visibility.

They think that its current share price has largely factored in the negatives like the rising interest rate and recession risk scenario, and the analysts say that the risk-reward proposition for ST Engineering’s current valuations “seems attractive”. ST Engineering is trading at around 2 standard deviation. below its historical mean.

As of 1.09 pm, shares of ST Engineering were trading at $3.42, with a FY2023 P/B ratio of 4.1 and a dividend yield of 4.7%.

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