In a Feb 21 note, Jaiswal says ST Engineering outperformed the Straits Times Index (STI) this year, and remains a defensive earnings growth pick.
“In the medium term, CA and USS should continue to drive growth. We estimate 18%, 63%, and 8% EBIT CAGR from the CA, USS, and defence and public security (DPS) segments respectively in 2022–2025.”
Jaiswal is staying “buy” on ST Engineering with a higher target price of $4.50, up from $4.45 previously. The new target price represents a 15% upside against its last traded price and includes a 4% ESG premium based on RHB’s proprietary methodology.
However, the 4% ESG premium is down from 6% previously, as the country median has risen slightly.
See also: ST Engineering powers up multiple growth engines
Investment thesis has not altered
Jaiswal still believes that ST Engineering’s “solid” $27.5 billion outstanding orderbook should give nearly three years of revenue visibility.
“ST Engineering should see defensive earnings growth. In the medium term, CA should benefit from higher Maintenance, Repair and Overhaul (MRO) earnings as aviation traffic, particularly in Asia, sees gradual improvement.”
CA should also see better profits as the passenger-to-freighter (PTF) conversion business continues to grow, offering economies of scale and improvements in the learning curve, adds Jaiswal.
The USS unit's earnings should improve as a result of the rightsizing exercise and earnings contribution from its TransCore acquisition, which was completed in March 2022, says Jaiswal, and the DPS business’ profitability should be supported by the gradual delivery of the orderbook.
Overall, Jaiswal expects 2HFY2023 patmi of $303 million, up 19% y-o-y and up 8% h-o-h. This is driven by CA reporting higher y-o-y operating profit.
“We estimate CA’s operating margin will improve to 8.8% in 2HFY2023F from 6.0% in 2HFY2022 and 8.2% in 1HFY2023. We expect USS to see a return to operating profit after an operating loss of $31 million in 1HFY2023, which includes $24 million in SatixFy divestment losses and $2 million in Satcom severance expenses. Amid expectation of a moderation in operating profit margin, we believe DPS’s 2HFY2023F operating profit will moderate h-o-h,” writes Jaiswal.
On sustainability, ST Engineering set a target in 2021 to reduce its emissions by 50% over the 2010 base year by 2030.
It is also targeting halving absolute Scope 1 and Scope 2 emissions by 2030 compared to a 2010 base year.
In 2022, ST Engineering was included in the Dow Jones Sustainability Asia Pacific Index as identified by S&P Global through the Corporate Sustainability Assessment. It is also a component stock of the iEdge SG ESG Transparency Index and the iEdge SG ESG Leaders Index.
ST Engineering is one of The Edge Singapore’s 10 stocks to watch for 2024.
As at 11.16am, shares in ST Engineering are trading 3 cents higher, or 0.77% up, at $3.95.
