“We remain positive on ST Engineering’s ability to deliver 10-15% earnings growth per year between FY2023 and FY2025, driven by revenue and margin improvements across all its business divisions,” writes Tan in his April 10 report.
He notes that ST Engineering is trading at an inexpensive 19x forward PE versus its 10-year historical forward PE of 20x.
The key contracts won recently include one providing maintenance, repair and overhaul services for CFM International, and a $430 million turnkey rail service contract for a Taiwan’s mass rapid transit system.
Last but not least, a contract from Singapore to build six naval vessels.
Besides winning the orders, Tan believes that the company is on track for margin recovery in the current FY2023, reaching an estimated 9.4% by end of the year.
One reason for the better margins should come from reduced integration costs incurred from its recent $2.7 billion acquisition of the Transcore traffic management system provider firm in the US.
Another cost reduction should come from lower energy costs, as well as from stemmed losses from its US shipyard business that have been sold.
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The way Tan sees it, ST Engineering remains a long-term investment with strong upside growth.
“More importantly, ST Engineering’s ability to generate strong free cash flow should ease concerns about its elevated debt levels,” adds Tan, who expects the ratio of net debt to equity to improve from FY23 onwards.
