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Maybank lowers ST Engineering's TP, net profit forecasts amid rising interest rates

Felicia Tan
Felicia Tan10/13/2022 05:56 PM GMT+08  • 2 min read
Maybank lowers ST Engineering's TP, net profit forecasts amid rising interest rates
The ST Engineering hub in Singapore. Photo: Albert Chua/The Edge Singapore
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Maybank Securities analyst Kelvin Tan has kept “buy” on Singapore Technologies Engineering (ST Engineering) as he sees the group as a “defensive giant” in trying times.

The trying times Tan was referring to, is the spate of aggressive rate hikes made by the US Federal Reserve (US Fed) in a bid to combat inflation.

The analyst has, however, lowered his target price to $4.20 from $4.50 previously as he ups ST Engineering’s risk-free rate and cost of debt.

As Tan increases his interest expense for the FY2022 to FY2024 by 15%-25%, the analyst has trimmed his net profit forecasts by 2%-3% for the same period.

ST Engineering’s FY ends in December.

“As the cost of debt is rising, funding the acquisition of TransCore remains a key concern among investors. Noted that bulk of ST Engineering’s floating-rate debt is short-term commercial paper (CP) with $2.8 billion outstanding,” he writes.

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“We believe [the group’s] CP will face pressure from rising interest rates as the short duration exposes it to rollover risk upon maturity,” he adds, pointing out that ST Engineering still holds US$32 million ($46.0 million) in reserves on its balance sheet.

“We think ST Engineering will refinance a portion of its CP in FY2023 by issuing longer-duration bonds with a lower yield,” Tan notes.

“However, we believe ST Engineering’s strong order book (+22% ytd) and FY2023-FY2024 earnings per share (EPS) growth of 10%-12%, may be key catalysts in this recessionary environment,” the analyst says.

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At its current share price levels, ST Engineering is trading at an FY2023 P/E of 16.68x, below its five-year mean with 23% upside potential.

Under Maybank Securities’ enhanced environmental, social and governance (ESG) review, ST Engineering scores 58 points, which is above average.

According to Tan, ST Engineering’s ESG score could be improved with more transparency.

“ST Engineering has an established an ESG framework and internal policies, but could further improve its quantitative “E” metrics. The company’s targets include reducing carbon emissions by 50% by 2030 (against 2010 baseline),” the analyst says.

“We think a higher degree of transparency with a more comprehensive plan towards Scope 3 emission and waste reduction would enhance its overall ratings. ESG scores could also be higher with further disclosure on waste and water consumption,” he adds.

Shares in ST Engineering closed 3 cents lower or 0.92% down at $3.25 on Oct 13.

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