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RHB’s Jaiswal crowns ST Engineering 'diamond in the rough' within Southeast Asia

Ng Qi Siang
Ng Qi Siang • 3 min read
RHB’s Jaiswal crowns ST Engineering 'diamond in the rough' within Southeast Asia
ST engineering was the only Singapore stock included on Jaiswal's list and net margin is expected to expand from 7.2% in 2020 to 8.1% in 2022.
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RHB analyst Shekhar Jaiswal has named global technology, defence and engineering group ST Engineering as one of the research house’s best investment ideas for Southeast Asia -- the only stock from Singapore included in his list. The group’s well-diversified portfolio and strong focus on technology and innovation make it a resilient earning proposition and heralds strong long-term potential growth, leading to Jaiswal giving it a “buy” call with a $3.90 target price.

In a July 29 report, Jaiswal chose 13 stocks, which he calls “diamonds in the rough”, based on several criteria, including return on equities (ROEs) of 15% or above, increasing margins, and net debt or shareholders’ funds of less than 0.7x.

On ST Engineering, he estimates its ROE to improve from 22.5% in 2020 to 26.8% in 2022 and net margin to expand from 7.2% in 2020 to 8.1% in 2022.

“This should be backed by strong profit growth and margin expansion from gradual recovery in global aviation and normalisation of order deliveries across all segments,” he says.

The firm’s record high order book of $16.3 billion offers more than two years of revenue visibility. It is also taking a long-term view by strengthening core businesses and exploring new opportunities in cybersecurity and robotics. With smart city initiatives flourishing both at home and abroad, Jaiswal believes that this push towards building digital transformation will be a key growth driver for ST Engineering.

Despite a predicted decline in earnings in 2020, dividend per share will likely remain constant at 15 cents to the delight of investors vis-a-vis other large-cap firms that are cutting dividends. With strong earnings recovery expected for 2021, Jaiswal sees ST Engineering trading above its historical average at a price-to-earnings (P/E) ratio close to its historical average of 19. Positive FCF generation, balance sheet strength and robust liquidity with AAA-rated debt could open the door to earning accretive acquisition to support long-term growth.

Corporate governance processes at ST Engineering are robust, with the firm publishing related practices and activities with specific reference to the guidelines of the Singapore Code of Corporate Governance 2012 in its annual reports. The only blemish on this otherwise spotless record was a corruption scandal involving ST Engineering employees in 2016. Other key risks to earnings comprise slow aerospace MRO recovery, deferment of contracts in the electronic sector and lower than expected contributions from new acquisitions.

As at 3.51pm today, ST Engineering is trading 0.01 points higher at $3.32 with a price-to-earnings ratio of 18.2. Dividend yield currently stands at 4.52%.

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