RHB Research’s Shekar Jasiwal has maintained his “buy” call on ST Engineering (STE) with an unchanged target price of $4.40. 

In a Jan 14 note,  Jasiwal said his “positive view” was based on expectations for a sustained earnings growth in the medium term, which will be supported by a gradual recovery in demand and gains from cost optimisation. 

He noted STE’s high order backlog, resilient earnings, robust balance sheet, and ability to generate strong positive free cash flows should enable it to sustain dividend payments. 

Furthermore, recently-announced business reorganisation plans and potential for M&A could support earnings growth beyond 2021.

Jasiwal noted that STE’s continues to deliver on its orders, elaborating that STE will deliver 50 double decker buses, with three sets of doors, instead of the usual two to Singapore’s Land Transport Authority in end Jan, after winning a $30 million contract in 2019. 

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On its passenger to freighter (P2F) conversion business, The company also delivered last week to BBAM (a leading aircraft leasing company), an A321 P2F aircraft. The group is contracted to supply several more P2F aircraft units to BBAM. STE plans to ramp up its P2F capacity from currently nine to 25 by 2023, and has already booked out all its P2F slots for 2021. 

Cirium, an aviation analytics firm, expects the number of P2F conversions globally to rise by 36% to 90 planes in 2021 and to 109 planes in 2022. While he believes that aviation maintenance, repair and overhaul (MRO) business may have bottomed out, “rapidly growing P2F business will offset some of the near term weakness in STE’s MRO business.” Jasiwal highlighted.

Furthermore, Jaiswal thinks there is a new business opportunity for the company as STE and Honeywell Aerospace have signed a 10-year agreement for the maintenance of CFM International’s Leap engine components. 

The agreement has STE as the exclusive provider of component MRO and repair services in the Asia-Pacific for Honeywell components on the Leap engines, which power the Airbus A320neo family, Boeing 737 Max, and the in-development Comac C919. 

He views this deal positively, and has expectations of a steady revival in deliveries of A320neo aircraft by Airbus, as well as a gradual return of grounded Boeing 737MAX aircraft into active service over next few years.

“STE’s defensive business should remain attractive to investors who are looking for greater visibility of earnings growth in a year of uncertain and uneven economic recovery,” he said, adding that STE’s $15.8 billion order book offers two years of revenue visibility. 

He also expects STE to maintain a 15 cent distribution per share (DPS) for FY2020 and FY2021, On the back of expected profit recovery. 

As at 11.09 am, shares of STE were trading at $3.88, with a FY2020 price to book ratio of 5.8% and dividend yield of 3.8%