Despite a likely slower profit recovery arising from the Covid-19 pandemic, RHB analyst Shekhar Jaiswal remains steadfastly behind ST Engineering. He believes that the counter will record strong growth in 2021 on the back of normalised order deliveries across all segments. He has therefore once again maintained his “buy” call on the counter and $3.90 target price, accompanied by an 18% upside.

“Given its record-high orderbook that offers revenue visibility beyond 2020, a well-diversified business model that will mitigate near-term earnings volatility, sustainable dividend payout and below average P/E valuation, we believe ST Engineering could continue to outperform the STI in 2020,” says Jaiswal. RHB has consequently named the stock one of its “diamonds in the rough” for Southeast Asia, with global technology, defence and engineering group being the only Singapore stock on the list.

Doubts about the counter are understandable due to a potential earning downgrade for 2020, with ST Engineering already experiencing a 23% downgrade in earning estimates for the year. Concerned investors are still seeking management guidance on the firm’s 2H2020 outlook at its upcoming earnings release.  But in spite of these uncertainties, a bullish Jaiswal places his faith in ST Engineering’s well-diversified portfolio and resilient defence earnings, with its high order backlog worth $16.3 billion likely to provide revenue visibility going forward.

ST Engineering’s strong technological capabilities are also expected to provide strong earnings growth, which has been boosted by $146.6 million worth of smart mobility contracts awarded to it by the Land Transport Authority (LTA). These are to provide an integrated supervisory control system (ISCS) and communications system for the MRT’s upcoming Jurong Region Line. A key part of the MRT’s remote supervision and control system, this offering forms part of ST Engineering’s lucrative smart city offerings and will contribute to its electronic earnings.

Despite concerns about reduced earnings this year, Jaiswal is confident that ST Engineering will be able to maintain its dividend of $0.15 per share for this year vis-a-vis other large-cap companies. This is especially following an MAS call for banks to cap dividends at 60% of last year’s payout. Jaiswal sees little deviation from ST Engineering’s typical interim dividend of 5 cents per share when 1H2020 results are announced on 14 August.

Best of all, Jaiswal believes that expected strong earnings growth in 2021 have yet to be priced in, with its 2021 price-to-earnings (P/E) ratio below its 10-year average of 19. He predicts that a strong earnings recovery next year should see the counter trading above its historical average. Investors now have the opportunity to now ride this upcoming wave of growth at a bargain.

Still, Jaiswal warns investors to beware the risks of a slower recovery in ST Engineering’s Aerospace MRO business as well as a deferment of electronic contracts, which could potentially stymie the growth of this promising counter. Lower contributions from new acquisitions and delays in the Singapore government’s Smart Nation initiative rollout due to Covid-19 could also lead to downsides for the stock.

As of 2.14pm, ST Engineering is trading 0.06 points lower at $3.25 with a P/E ratio of 17.64. Dividend yield presently stands at an attractive 4.62%.

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