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ST Engineering should continue to 'outperform the STI' apart from potential second wave of infections: RHB

Felicia Tan
Felicia Tan • 2 min read
ST Engineering should continue to 'outperform the STI' apart from potential second wave of infections: RHB
Despite the overall decline on profit owing to the weaker demand in 2020, RHB analyst Shekhar Jaiswal believes the reopening of the economy following the circuit breaker measures should bring profits again for 2021F.
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SINGAPORE (June 19): While overall profit will decline on weaker demand, supply chain, as well as workforce disruption owing to the Covid-19-induced lockdowns around the world, RHB analyst Shekhar Jaiswal believes the reopening of the economy following the circuit breaker measures should bring profits again for 2021F.

As such, Jaiswal has maintained his “buy” call on the company, with an unchanged target price of $3.90, which represents a 14% upside on the counter.

Barring the risk of a second wave of Covid-19 infections, ST Engineering should continue to “outperform the Straits Times Index (STI)” on its diversified portfolio over four segments – aerospace, electronics, land systems, and marine – which has helped the company earn resilient earnings, writes Jaiswal in a note dated June 19.

The company’s record-high order book of some $16.3 billion that offers two years of revenue visbility, and a sustainable distribution per share (DPS) of 15 cents, also put the company in a superior position compared to other large-cap STI counters.

Jaiswal is also positive on the counter for its capitalising on new demand opportunities in cybersecurity and robotics.

“We expect Smart City initiatives, in Singapore and overseas, to be a key contributor to earnings in the long term,” he says.

In another upside for the company, ST Engineering has received the authorisation from the Civil Aviation Authority of Singapore (CAAS) recently to use its inhouse developed drone solution, DroScan, to carry out general visual inspection during aircraft maintenance on approved aircraft models at its Singapore MRO facilities.

DroScan reduces the need to set up bulky ground equipment required during manual inspections. Instead, inspection can be done using live video feeds and images captured by the drones.

Jaiswal has predicted a recurring net profit of $506 million for Dec 20F, a 14.2% y-o-y drop from Dec 19’s earnings of $589 million. He also forecasts $568 million – or a 12.3% y-o-y growth – in earnings for Dec 21F.

“Its 2021 price-to-ratio earnings (P/E earnings) is close to its 10-year average of 19x,” he says.

“Given expectations of a strong earnings recovery in 2021, STE should trade above its historical average. With its positive FCF generation, strong balance sheet and liquidity, the company could also undertake earnings-accretive acquisitions to support long-term growth,” he adds.

As at 4.15pm, shares in ST Engineering are changing hands 2 cents lower, or 0.6% down, at $3.39.

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