SINGAPORE (Feb 25): Despite the worsening spread of the novel coronavirus (Covid-19), analysts are confident that the impact on ST Engineering (STE) will be limited.

In fact, they reckon the engineering company — which provides technology solutions to the aerospace, electronics, land systems and marine sectors — could expand its bottom line.

RHB Securities says STE is “well-positioned” to deliver earnings growth of 10% from 2019 to 2022.
This will come from the company’s record-high order book, contributions from new acquisitions and continuing investments to expand its capabilities in aerospace and electronics, it says.

“About half of the impact of the impact from the outbreak, if any, will be felt by the aerospace unit — where STE is already working with airlines to rearrange maintenance schedules around changes to the latter’s operations,” RHB analyst Shekhar Jaiswal writes in a note dated Feb 25.

“We maintain that STE’s business and geographic diversity, as well as the long-term nature of its contracts, ensure that its revenue remains relatively shielded from short-term uncertainties,” he adds.

STE’s aerospace business is expected to do better ahead.

Engine nacelle manufacturer Middle River Aerostructure Systems (MRAS), which the company had acquired from GE Aviation early last year, will continue to contribute positively, says RHB.

The company’s airframe maintenance, repair and overhaul business set up in Vietnam should also contribute positively as it pursues new passenger-to-freighter conversion contracts, it adds.

Moreover, STE has securitised 30 engines that were held under its leasing business.

“This process will improve the group’s capital structure and will ensure that it remains the asset manager for engines, while continuing to receive service fees,” says Jaiswal.

As such, CGS-CIMB Research says STE’s aerospace business could record a y-o-y earnings growth of 13% in FY20 ending Dec 31.

This is in addition to better aircraft maintenance and modification activity, following the divestment of its Australian pilot school late last year, CGS-CIMB says.
STE’s land systems business could also do better ahead.

CGS-CIMB expects the land systems business to register y-o-y earnings growth of 17% in FY20.

This will come from the delivery of the Hunter Armoured Fighting Vehicle (AGC), 20 units of Electric Bus and 50 units of three-door double decker buses. 

In addition, growth in STE’s electronics business will be driven by contributions from the acquisitions of Newtec and Glowlink, says RHB.

The company’s Smart City business, largely driven by the electronics business, remains “on track” to become a $2 billion business by 2022, it adds.

RHB has maintained its “buy” call for the stock with a higher target price of $4.90 from $4.55 previously.

CGS-CIMB has also kept its “add” rating for the stock with a higher target price of $4.66 from $4.47 previously.

“We believe the double-digit growth in FY20 could keep valuations at a premium amidst a weak macro backdrop, sustained by order book of $15.3 billion,” CGS-CIMB head of research Lim Siew Khee writes in a note dated Feb 24. 

As at 11 am, STE was up 20 cents or 4.8% at $4.40, with 7.5 million shares changed hands.