Lim Hui Jie Thu, Jun 02, 2022
In an anecdotal example of how air travel has resumed, CGS-CIMB’s Lim Siew Khee was bumped off a recent flight back from Europe because of over-booking.
“There were also pockets of delays in short-haul flights due to shortage of ground-handling staff in airports, affirming the trend of robust recovery by the European carriers,” writes Lim in her June 1 note on ST Engineering.
Besides supplying the military, ST Engineering is a significant player in the aircraft maintenance, repair and overhaul market.
“We think ST Engineering is in a sweet growth spot, with tailwinds from smart spending and aviation recovery,” writes Lim, summarising a non-deal roadshow the brokerage organised for the company. She has an “add” call and $4.70 price target on the stock.
As of 1QFY2022, ST Engineering’s airframe maintenance was operating at 90-95% of pre-Covid capacity, with revenue at 86% of 2019 levels, largely driven by passengers to freighters (PTF) conversion.
As a result, ST Engineering’s global PTF hangars are fully booked till 2026 for wide-body aircraft.
Within the aviation business value chain, management sees the fastest recovery from its OEM segment as aircraft deliveries are accelerated, followed by engines and components, as airlines are still using green-time from parked aircraft since the pandemic hit.
Green time engines refer to older engines with limited life remaining that have been taken from aircraft that have been retired and parted out.
As such, she has forecasted a combined commercial and defence aerospace recovery for ST Engineering to about 94% and 101% of pre-Covid revenue for FY2022 and FY2023, and sees the potential for a stronger recovery.
Separately, Lim notes that ST Engineering is known for its smart city transformations, but is of the view that the investment community “may still need time to fully understand its vast capabilities.”
She explains that the three “key pillars” of smart cities involve smart mobility, smart environment and smart security, and these span ST Engineering’s urban solutions and satcoms (USS) and defence and public security (DPS) clusters.
“We believe ST Engineering can replicate its smart city capabilities overseas, mainly via working with local contractors and consortiums,” Lim writes, pointing out that ST Engineering was part of a $450 million consortium for turnkey smart metro solutions for Taiwan’s Kaohsiung MRT Red Line Extension in November 2021.
It was also awarded a US$256 million consortium tender to implement 450,000 public lighting units and smart city infrastructure in a public-private partnership project for a municipality and RioLuz public utility in Brazil.
In its 2021 Investor Day, ST Engineering has a target to double its smart city revenue from $1.7 billion to $3.5 billion by 2026, and Lim believes this can be achieved with its Transcore acquisition, potentially adding about $800 million of revenue per annum.
Similarly, Maybank Securities’ Kelvin Tan has initiated coverage on Singapore Technologies Engineering (ST Engineering) with a “buy” call and $4.75 target price, given how resumption of air travel is likely to translate into more demand for the company’s aerospace engineering business.
Tan notes that the company’s spate of acquisitions over the past year — including traffic management system provider Transcore, its largest to date — will help drive a higher volume of business in new and fast-growing areas.
There is also a growing addressable market of defence contracts that ST Engineering can bid for — given heightened geopolitical volatility.
Along with a recent reorganisation of the company that breaks down silos between its major subsidiaries, thereby extracting synergies, Tan sees ST Engineering well poised to deliver better earnings, stable dividends, on the back of its record (and growing) order book of $19.3 billion.
“The recent restructuring, which focuses on pushing greater integration across what have historically been silo-like divisions, could be a material positive,” writes Tan, who is projecting the company’s pretax profit margin to increase from 9% in FY2021 to 10.2% by FY2024, mainly on efficiencies in smart cities initiatives coupled with strong order book growth.
He sees “potential surprise to the upside” from higher revenue from cross-selling, as well as better cost efficiencies from central procurement in the coming two to three years.
ST Engineering is now trading at around 22.6x FY21 earnings, which is a premium to Singapore large-cap industrials’ average of 12.4x.
However, Tan points out that it “correspondingly (and consistently)” generates a much higher return on equity than all peers in this category.
While ST Engineering has recently taken on more debt to fund its acquisitions, Tan believes that its capacity to pay dividends “could hold steady” because of its resilient earnings and cash flow. “Its diversified business carries high exposure to defence, public security and critical infrastructure projects, which may buttress the company against uncertain commercial aerospace demand,” notes Tan.
In a sign of better earnings visibility, the company has recently changed its policy of paying dividends every half a year to every quarter.
As of 12.20pm, shares of ST Engineering traded at $4.15, with a FY2022 P/B ratio of 4.77x and dividend yield of 3.89%