SINGAPORE (Jan 18): CIMB is maintaining its “add” recommendation on ST Engineering with a target price of $3.85.

This came on the back of the group announcing on Wednesday that its aerospace arm secured $510 million in new contracts for 4Q17, bringing FY17 contract wins to $2.8 billion, an 8% increase y-o-y.

See: ST Engineering's aerospace arm secures $510 mil in contracts for 4Q17

At a group level, ST Engineering secured a record $6.3 billion worth of contracts for FY17, excluding 4Q17 electronics contract wins.

During the quarter, Elbe Flugzeugwerke, the joint venture between ST Aerospace and Airbus redelivered the first A330-300 Passenger-to-Freighter (PTF) converted aircraft to launch customer, DHL Express.

Following this deliver, prototype costs are expected to gradually decrease.

In a Wednesday report, analyst Lim Siew Khee says, “We expect strong 4Q performance from the electronics division as well (4Q17 contract wins have yet to be announcement).”

As at 9M17, the electronics division secured $1.5 billion worth of contracts that comprises $1 billion of advances/infocomm projects.

The analyst is hopeful that more contracts for security and traffic management from both the commercial sector and governmental agencies would be underway.

“We estimate the division could end the year with about $2 billion of contracts (2016: $2.3 billion, 2015: $1.6 billion),” says Lim.

Meanwhile, oil prices are rising and this could mean stronger ship repair/conversion jobs returning for the group’s marine division.

“The only overhang we see is the potential for provision for arbitration with Hornbeck (US$43.5 million of revised damages claim vs. STE’s counterclaims of US$3.3 million),” says Lim.

The analyst believes that the stock is currently cheap as it is trading at 16 times CY19F earnings, below its five-year average for 20 times 12M forward earnings.

However, the stock underperformed its peers such as Keppel Corporation and Sembcorp Marine in the capital goods sector YTD mainly because of its lacklustre quarterly earnings and recurring provisions for marine. It has also underperformed its airport service peer SATS.

As at 10.45am, shares in ST Engineering are trading at $3.31 or 17.80 times FY18 earnings with a dividend yield of 4.78%.