UOB Kay Hian has re-initiated coverage on Singapore Technologies Engineering (ST Engineering) with a “buy” recommendation and a target price of $4.60.

“Our target price implies 23.5x FY2023 P/E, or 1.3 standard deviation above its historical average. This is plausible as ST Engineering’s strong orderbook provides good visibility for growth in the medium term,” writes analyst Roy Chen.

“The target price translates to 11.1% upside (total return of 15.0% if including the 3.9% yield) over ST Engineering’s last close price of $4.14, which is at 21.1x FY2023 P/E, or 0.1 standard deviation below its historical average forward PE of 21.3x,” he adds.

In his report dated June 6, the analyst is positive on the counter’s prospects, as he sees it being a “fine balance” of defence and growth.

“As an anchor supplier to Singapore’s Ministry of Defence and an integrated solutions provider to a number of Singapore governmental agencies, ST Engineering is a strategic cornerstone of the country’s defence and security structure,” the analyst writes.

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The counter had demonstrated “good resilience” during the Covid-19 pandemic, and its defence and public security is set to grow in tandem with Singapore’s defence spending.

ST Engineering is also set to benefit from the growing demand of international customers amid a volatile global security climate and geopolitical landscape, says Chen.

With a suite of solutions that address the various needs of cities, including their connectivity, mobility, security, infrastructure and environmental needs, ST Engineering is “well poised” to ride the rising demand, he adds.

“In addition, as the world’s leading satcom ground segment technology provider, ST Engineering is at the forefront of the satcom sector’s revolution and is well-positioned to capture business opportunities unlocked by the Low Earth Orbit satellite technology,” Chen writes.

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ST Engineering’s commercial aerospace segment is also likely to recover fully by the end of FY2023, according to the analyst’s estimates.

To him, promising signs include the high utilisation of ST Engineering’s existing airframe maintenance, repair and operations (MRO) capacity, as well as its slots for several freighter conversion programmes having been fully booked till 2024/25.

In addition, Airbus’ ramping up of its aircraft production will benefit ST Engineering’s nacelle original equipment manufacturer (OEM) business, as well as ST Engineering’s investing in new freighter conversion and MRO capacities will contribute to the revenue recovery during the FY2023, says the analyst.

Finally, the group’s record orderbook of $21.3 billion as at the end of the 1QFY2022, provides “good revenue visibility” and underpins Chen’s revenue CAGR projection of 10.9% for the FY2022 – FY2024.

On this, Chen has conservatively forecast a flat core net profit of $526 million for the FY2022. The figure excludes one-off gains and losses, but includes the Covid-19 related government grants.

“We expect the positive impact from the improving business performance to be offset by the drop in grants,” Chen writes.

“Excluding the effect of government grants, ST Engineering’s core net profit would have risen 64% y-o-y in FY2022 by our estimate,” he adds.

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Moving forward, the analyst has estimated that ST Engineering’s core net profit will grow by 16.7% and 6.1% in 2023 and 2024 respectively, driven by revenue growth and margin improvement helped by operating leverage.

The analyst is estimating revenue for the FY2022 to reach $9.6 billion, which represents a “remarkable growth” of 24.2% y-o-y, driven by both organic business growth across all business segments as well as fresh contribution from TransCore, which was acquired in March.

“Thereafter, revenue is expected to grow 6.1% and 3.5% in FY2023 and FY2024 respectively, mainly due to organic business growth and higher project deliveries,” he writes.

In his view, catalysts to the counter’s share price includes strong contract win momentums, as well as stronger-than-expected earnings growth. Meanwhile, a negative margin surprise due to project cost overruns or failure to pass down cost pressures from inflation, as well as events that may disrupt the recovery of the aviation sector, are downside risks.

Other downside risks include a prolonged global supply chain disruption that may dampen ST Engineering’s growth outlook, as well as the failure to realise growth and synergies from the acquired entities.

As at 10.42am, shares in ST Engineering are trading 1 cent higher or 0.24% up at $4.14, or an FY2022 P/B of 5.7x and dividend yield of 3.9%.

UOB Kay Hian re-initiates 'buy' on ST Engineering with TP of $4.60

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