UOB Kay Hian has upgraded Singapore Technologies Engineering (ST Engineering) to “buy” with an unchanged target price of $4.25.

“We value ST Engineering on an EV/Invested Capital basis and have raised our terminal growth rate assumption to 2.7%,” writes analyst K Ajith in a September 14 report.

To Ajith, the counter’s stock price, which has declined by 7.8% following its results for the 1HFY2021 ended June, represents an opportunity to accumulate more shares in the group.

On Aug 12, ST Engineering reported a 15% y-o-y increase in earnings of $296.1 million for the 1HFY2021. The group also registered a 2% growth y-o-y in revenue of $3.65 billion.

Despite the good showing, Ajith surmises that the decline in ST Engineering’s stock price was partly due to concerns that its earnings for the 2HFY2021 could be weaker h-o-h.

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The concerns came amid a slowdown in US airline seat capacity, as well as global hesitancy to receive vaccinations, especially in the US.

To be sure, Ajith has identified higher vaccination rates in the US to be one of the share price catalysts for the group.

In his report, Ajith says there are reasons to be optimistic looking beyond 2022.

This includes the securing of two engine maintenance contracts, one of which being an exclusive five-year contract with Alaska Airline. The contract with the airline is set to commence in 2022.

Secondly, ST Engineering announced, in August, that it had, through Elbe Flugzeugwerke (EFW), secured new Airbus A320/A321 passenger-to-freighter (P2F) orders and options from BBAM leasing.

EFW is a joint venture between ST Engineering and Airbus.

To Ajith, the contracts hold “scope for gradual pick-up in aerospace earnings by mid-2022”.

In addition, the group’s defence and public security (DPS) business is more resilient, accounting for 68% of revenue in its 1HFY2021 results.

The business also accounted for the highest improvement in base operating earnings among the rest of the group’s businesses.

“Aside from naval contracts (berthing barges, polar security cutters, and oceanographic survey vessels) for the US Navy, ST Engineering is a key contractor for Singapore’s public security and is also involved in the deployment of security robotics at key infrastructure installations,” he writes.

“Given the early and successful adoption in Singapore, we believe that ST Engineering will be able to expand such robotics solutions outside Singapore. The DPS segment could also receive a boost if ST Engineering and its US defence partner, Oskosh Defence are selected to produce 200 Cold Weather all-terrain vehicle (CATV) for the US army,” he adds.

ST Engineering has also scored other wins including the $180 million contract to renew and modernise the communications systems for Singapore’s MRT and LRT lines.

See: ST Engineering and Siemens Mobility consortium win $180 mil contract to modernise comms system for Singapore's MRT lines

The group also announced, on Sept 13, that its smart lift monitoring solutions will be implemented across Singapore, a move that will boost its urban solutions and satcom business.

See also: ST Engineering's smart lift monitoring solution to be progressively installed on lifts in Singapore

To this end, Ajith sees ST Engineering’s record orderbook of $16.8 billion and dividend yield to limit downside risk. As it is, the group’s orderbook as at end-June, stood higher than that of pre-Covid-19 levels.

ST Engineering should also be able to maintain its dividend payout of 15 cents, which translates to a yield of 3.99% at $3.76, he adds.

Shares in ST Engineering closed 5 cents higher or 1.3% up at $3.81 on Sept 14, with an FY2021 P/B of 5.1 times.

Photo: Albert Chua/The Edge Singapore

See also: ST Engineering's current share price weakness an opportunity to accumulate: RHB