RHB Bank Singapore’s report on ST Engineering (STE) may have arrived a day after that of peer brokerages, but analyst Shekhar Jaiswal has unveiled the biggest target price increase among research houses here.
Jaiswal’s March 20 note carries a $7.80 target price for STE, up from $5.90 previously. With a “buy” call, Jaiswal’s fair value increase is 10 cents higher than that of CGS International Research analysts Kenneth Tan and Lim Siew Khee. CGSI had increased its target price on STE to $7.40 from $5.60 previously, or $1.80 higher.
The analysts are sold on STE’s new five-year targets till 2029, which the company’s leaders unveiled at a March 18 investor day. Among the targets is a $17 billion revenue goal, which indicates a CAGR of 9%; and for net profit CAGR to exceed revenue CAGR by up to 5 percentage points (ppts).
Jaiswal admits his own FY2029 targets for STE are not as bullish, but believes “strong tailwinds” for STE’s commercial aerospace (CA) and defence and public security (DPS) segments will support double-digit profit growth from FY2024 to FY2027.
Instead, the RHB analyst expects STE to post FY2029 revenue of $16 billion, or a 7.2% CAGR; and patmi of $1.2 billion, or 10.5% CAGR. This is below STE’s CAGR targets of 9% for revenue and up to 14% for patmi.
Jaiswal adds that his estimate implies profit growth will exceed revenue growth by 3 ppts, and not 5 ppts as STE’s management have indicated.
See also: ST Engineering scores higher target prices after unveiling ‘solid’ five-year revenue, profit targets
Separately, STE will also shift to a payout-based dividend per share (DPS), with incremental DPS amounting to one-third of y-o-y net profit increase from FY2026.
“We assess that the revised dividend policy implies a dividend/share floor of 18 cents and at least 1 cent of annual increase in dividend per share,” writes Jaiswal.
Updating valuation
See also: ST Engineering jumps 2% after raising dividend policy
STE’s upside risks, according to Jaiswal, could come from higher margins for its international defence business, lower interest costs amid more aggressive debt repayment and falling interest rates and higher dividend payments.
Jaiswal says STE’s free cash flow (FCF) yield is significantly higher than the dividend yield throughout the forecast period, a point Morningstar Equity Research analyst Lorraine Tan also noted in her March 18 report.
STE’s revised dividend policy, notes Morningstar’s Tan, implies that STE’s payout ratio will fall to around 54% in 2029 from 76% in 2024. “With higher cash retained, we think STE should be poised to make material acquisitions from 2028 depending on the size.”
RHB’s Jaiswal now values STE based on FY2026 estimates “to better reflect long-term growth potential”. He has extended his discounted cash flow (DCF) model to include cash flows from FY2028 to FY2030.
Jaiswal’s target price continues to incorporate an unchanged 4% environmental, social and governance (ESG) premium over an organic fair value of $7.50, based on RHB’s proprietary methodology.
As at 9.47am, shares in STE are trading 15 cents higher, or 2.3% up, at $6.72. STE shares have surged around 45% year to date.
