RHB Group Research analyst Shekar Jaiswal remains optimistic on ST Engineering’s earnings recovery for FY2021 ending December, despite the company's unsuccessful bid for Cubic Corp.

The analyst retained his ‘buy’ rating for the counter, with a higher target price of $4.50 from $4.25 previously on the back of his valuation basis being rolled forward from 2021 to blended forward earnings, book value and EBITDA.

In a research note dated April 12, Jaiswal states ST Engineering’s earnings recovery in 2021 will be aided by normalisation of order delivery across key business segments.

“A high order book with more than two years of revenue visibility, its ability to sustain dividend payments, and potential growth momentum from defence business and Smart City initiative supports our call on the stock,” he says.

ST Engineering’s order backlog stood at $15.4 billion as of end-2020, implying a book-to-bill ratio of 2.2 years. $5.3 billion of this orderbook is expected to be delivered in 2021, which Jaiswal says is equivalent to 71% of his revenue estimate.

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In addition, Jaiswal believes ST Engineering’s diversified business will remain resilient even in the face of virulent variants of the Covid-19 virus potentially impacting economic recovery.

“We believe that ST Engineering’s well-diversified business will find interest with defensive investors in a risk off scenario, while for growth-seeking investors, a stronger economic recovery could further boost its earnings through higher order wins and earlier-than-expected recovery in its aviation maintenance, repair, and operations business,” he says.

On its defence business, Jaiswal notes that the company, via its partnership with Oshkosh Defence, was recently awarded a contract to produce prototypes for the US army’s cold weather, all-terrain vehicle (CATV). The prototype is to be delivered by 3Q2021 and the US Army has announced plans to issue a production contract for up to 200 CATVs in FY2022.

“If ST Engineering wins the contract it would build upon ST Engineering’s ambitions to grow its international defence business,” he says.

As at 2.45pm, shares in ST Engineering are down 2 cents or 0.5% lower at $3.97.