The analysts at OCBC Investment Research and Citi Research have kept both their “buy” calls on Singapore Technologies Engineering (ST Engineering) at raised respective fair values and target prices of $4.83 from $4.60 previously and $5.12 from $4.62 previously.
Meanwhile, the team of analysts at DBS Group Research has maintained its “buy” call, albeit at an unchanged target price of $4.80.
For the 1HFY2024 ended June, ST Engineering reported earnings of $336.5 million, a healthy 20% y-o-y increase from the same period last year.
The team at OCBC notes in their Aug 14 report: “The group reported in-line 1HFY2024 results, with revenue coming in at $5.5 billion (50% of our expectations), while net profit of $336.5 million was 49% of our full-year estimate.”
The group saw growth in most areas, with revenue growing 13.5% y-o-y in the period and net profit increasing 19.9% y-o-y. The commercial aerospace (CA) and defence and public security (DPS) segments remained ST Engineering’s drivers, growing 7% y-o-y and 8% y-o-y respectively.
“Urban solution and satcom (USS) delivered an earnings before interest and taxes (ebit) of $9 million, which was a reversal from 1HFY2023 losses, but was still down h-o-h,” adds the team.
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Furthermore, the group secured new contracts of around $6.1 billion, taking the total order book to $27.9 billion, of which $4.9 billion is expected to be delivered in the remainder of this year.
“The group declared a quarterly interim dividend of 4 cents per share, in-line with our full year expectations of 16 cents per share for FY2024,” writes the team.
Overall, the team at OCBC sees that ST Engineering is well-positioned to ride the aerospace and defence capital expenditure (capex) upcycle, while its USS segment could also see benefits from positive structural trends in the long term.
“After delivering total returns of 21% compared to 5% by the Straits Times Index (STI) in 2023, ST Engineering continues to outperform the STI year-to-date (ytd) with total returns of 12%,” concludes the team.
Potential catalysts noted by the analysts at OCBC include the recovery in ST Engineering aerospace segment, significant growth in contract wins driven by the electronics sector, as well as better-than-expected margins from projects.
Conversely, investment risks include a decline in oil prices, in turn pressuring the group’s marine business, lower-than-expected margins for new contracts, integration hiccups post-acquisitions and lastly, a delayed recovery in the group’s aerospace segment.
Meanwhile, Citi’s Luis Hilado notes that ST Engineering’s earnings meeting his and Bloomberg’s expectations, Satcom is the “final piece to put on track”.
He writes in his report: “Satcom as part of the USS division remained in losses but kept ebit flat despite lower revenues given cost reduction initiatives in end-FY2023.”
He adds: “Still evolving industry dynamics are a risk to execution risks.”
Hilado expects the group’s topline momentum to drive operational leverage and margin improvement across its core businesses. While near-term risks such as labour shortages and cost inflation persist, the analyst sees a healthy base of contracts to win providing a balance.
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He writes: “We believe with the in-line performance in 1HFY2024, the market will have confidence in FY2024 and thus look forward to FY2025.”
One key downside risk noted by the Citi analyst is the possibility of significant acquisitions initially dampening overall returns from integration.
Lastly, the team at DBS is monitoring the aerospace industry for bottlenecks, citing Airbus reducing its 2024 delivery forecast from 800 to 770 aircraft as an example.
They write: “Additionally, we are monitoring for signs of weakness among airline customers, as several have announced reductions in capacity growth, which would negatively impact maintenance, repair and overhaul (MRO) demand.”
On ST Engineering’s USS business, the team notes: “The ongoing underperformance of the satcom business, particularly compared to peers like Comtech and Gilat, raises concerns about iDirect's competitive positioning. Additionally, the indefinite pause of TransCore’s New York congestion pricing system poses questions about future operations and maintenance revenue and broader market reception to such initiatives.”
As at 1.40 pm, shares in Singapore Technologies Engineering are trading 18 cents higher or 4.12% up at $4.55.
