"The structural increase in global defence spending will likely remain intact regardless of the outcome of the Russia-Ukraine conflict. This should support ST Engineering’s visible earnings growth trajectory," says Lim.
However, she points out that current valuations look stretched, given how it is trading at a forward 12-month PE of 29.2x, which is looking "elevated" versus selected defence peers listed in the US and Europe that are at an average of 27.1x.
In addition, after taking into account various developments by ST Engineering including a string of divestments of businesses deemed non-core, Lim, in her Oct 8 note, has fine-tuned her valuation model and has raised her fair value to $9.03, up from $8.90 previously.
For example, on Sept 1, the company announced the sale of its 46.5% equity interest in CityCab to joint venture partner ComfortDelGro; it had earlier divested stakes in a broadband venture and its US construction equipment unit LeBoy.
"Investors may wish to consider accumulating the stock on corrections or pullbacks from current levels," says Lim.
In line with the gains of the share price, Lim has downgraded her call to "hold" from "buy".
ST Engineering shares changed hands at $8.97 as at 11.06 am, down 0.44% thus far today but up 92.9% year to date.
