RHB Bank Singapore's Shekhar Jaiswal has kept his "buy" call and $4.50 target price on ST Engineering after it won contracts worth $175 million to upgrade the public bus fleet in Singapore.
This latest contract win from the government adds to the company's already high order book of $27.4 billion.
"We remain upbeat on STE, which offers defensive dividends of 4 cents per quarter and strong profit growth," says Jaiswal in his May 6 note.
Under the scope of these contracts, ST Engineering, along with consortium partner Trapeze Group will upgrade the fleet management, fare collection and power and communications systems of the 5,800-strong bus fleet.
The upgrades will take advantage of the 5G network, allowing for faster fare transactions for commuters and faster data exchanges between the buses and the back-end systems, according to Jaiswal.
The upgrades will be implemented progressively from 2Q24 and completed by 2027.
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Over the past week, ST Engineering's share price dropped by around 3%, which Jaiswal figures is might be related to concerns around its leveraged balance sheet, as well as revised market expectations of interest rates remaining elevated for longer.
In its 1H23 results, ST Engineering had guided for a FY2024 weighted average borrowing cost of mid-3%.
As of end of last year, its total borrowings stood at $6.1 billion with the ratio between fixed vs floating-rate borrowings at 62:38.
In the event all debt is exposed to a floating interest rate, every 50bps rise in average interest costs would lower Jasiwal's earnings estimates for ST Engineering's FY2024 and FY2026 profit by only a 2-3%.
