RHB Group Research Shekhar Jaiswal has kept a “buy” rating on ST Engineering with a target price of $4.80.

For 1QFY2022 ended March, ST Engineering reported in-line revenue of $2 billion, some 13% higher y-o-y, with all segments - commercial aerospace (CA), urban solutions & satcoms (USS) and defence & public security - booking growth.

ST Engineering’s CA revenue rose to $674 million, up 22% y-o-y, at 26% of Jaiswal’s FY2022 estimate, while USS revenue increased by 12% y-o-y to $297 million, 23% of the analyst’s 2022 estimate.

Within the CA segment, its airframe maintenance, repair and overhaul (MRO) business has seen an almost full recovery from 80% capacity utilisation in 3QFY2021, while the engines and component MRO is operating at 80% capacity as compared to 70% in 3QFY2021.

Demand for passenger-to-freighter (P2F) services also remains strong – with Airbus A330 (A330) P2F conversion slots booked until 2026 and A320/A321 P2F conversion slots booked until 2025.

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“Increasing the scale of operations should boost its P2F profitability, as ST Engineering will double its P2F aircraft induction this year,” says Jaiswal.

The analyst also expects nacelle production to ramp up for the rest of 2022.

The Defence & Public Security (D&PS) segment’s revenue also rose to $1.1 billion up 9% y-o-y, at 25% of Jaiswal’s 2022 estimate.

Moreover, ST Engineering reported $2.4 billion worth of order wins in 1QFY2022 up 54% y-o-y. This comprised of $900 million from CA, $200 million from USS and $1.3 billion from the D&PS business.

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The CA business continued to see strong order wins with A330 P2F orders by DHL and CDB Aviation.

Additionally, the consolidation of TransCore from March 17 contributed $1.6 billion of orders into ST Engineering’s orderbook, which has now reached a record high of $21.3 billion, implying over two years of revenue visibility.

ST Engineering expects $5.8 billion of the orderbook to be realised as revenue in the last nine months of 2022, which is 94% of the analyst’s revenue estimate.

In addition, ST Engineering issued US$1 billion bonds, with US$700 million due in 2027 and  US$300 million due in 2032 and has managed to lower its weighted average cost of borrowing undertaken to acquire TransCore to 1.8% per annum, due to the favourable settlement of Treasure Locks gains of US$91 million, which will be amortised over the period of the bonds.

ST Engineering remains confident of covering up the $200 million gap from the government support shortfall through higher revenue, cost savings and productivity improvements.

“We remain upbeat on it delivering defensive growth, aided by a gradual revival in the aerospace business,” writes the analyst.

As at 11.26am, shares in ST Engineering are trading at 3 cents down or 0.73% lower at $4.06 at a FY2022 P/B ratio of 4.9x and dividend yield of 3.7%.

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