September 14, 2021

Looking More Attractive Post 7.8% Decline And New Order Wins

It is an appropriate time to relook at STE, following the 7.8% post results decline. While there is a concern about the pace of recovery in commercial aviation, STE continues to secure new PTF orders with a backlog till 2025. STE has also secured a rail maintenance contract as well as a sizeable but undisclosed lift maintenance and. monitoring solutions contract. At the current level, STE also offers an attractive dividend yield of 3.99%. Upgrade To BUY with a target price of S$4.25.

WHAT’S NEW

∙ Opportunity to accumulate post pullback; upgrade to BUY. ST Engineering’s (STE) stock price has declined by 7.8% post results, partly due to concerns that 2H21’s earnings could be weaker hoh, amid a slowdown in US airline seat capacity as well as vaccination hesitancy, particularly in the US. However, looking beyond 2022, there are reasons to be. optimistic. First, on the commercial aviation front, STE had announced that it had secured two engine maintenance contracts, one of which is an exclusive 5-year contract with Alaska Airline, set to commence in 2022. Next, STE also announced last month that its subsidiary,  EFW had secured new Airbus A320/A321 Passenger-to-Freighter (P2F) orders and options from BBAM leasing, with work to be carried out through 2025 and with options to add further conversion slots to 2026. This holds scope for gradual pick-up in aerospace earnings by mid-22.

∙ Defence and public security (DPS) business is more resilient and is also a growth area. This division accounted for 68% of revenue in 1H21 and accounted for the highest improvement in base operating earnings among the other divisions in 1H21. Aside from naval contracts (berthing barges, polar security cutters, and oceanographic survey vessels)for the US Navy, STE is a key contractor for Singapore’s public security and is also involved in the deployment of security robotics at key infrastructure installations. Given the early and successful adoption in Singapore, we believe that STE will be able to expand such robotics solutions outside Singapore. The DPS segment could also receive a boost if STE and its US defence partner, Oskosh Defence are selected to produce 200 Cold Weather all-terrain vehicle (CATV) for the US army. Two prototypes are currently being evaluated and an outcome is expected by 4Q21 or early-22.

∙ S$180m rail systems and communications contract win in Singapore pushes towards more greener buses with EV charging for SMRT buses. The S$180m contract to renew and modernise the communications systems for Singapore’s North–South and East–West lines along with Bukit Panjang LRT is expected to be spread out till 2029. Given the long gestation period for the contract, earnings impact is expected to be minimal. STE also showcased its EV charging technology for 20 SMRT buses, which will be charged using overhead pantograph chargers installed at Bedok and Bukit Panjang bus interchanges. The apparatus on the top of the bus connects to overhead electrical lines to recharge the batteries over a 30-minute period and will provide a mileage of 130km per charge. The technology would lead to a 50% fuel cost savings per km.

∙ Urban solutions and satcom segment will receive a boost from lift maintenance and monitoring solutions contract. Yesterday, STE announced that its AGIL Smart Lift monitoring solutions will be implemented across Singapore. While details were scarce, we take it that the contract applies to lifts at public housing. The solutions allow 24/7 remote lift status monitoring and diagnostics via smart sensors and provide predictive analytics of lift components to technicians via an app. STE did not disclose the size of the contract.

STOCK IMPACT

∙ Record orderbook of S$16.8b and 4% dividend yield should limit downside risk. STE’s orderbook as at end-2Q21 was higher than pre-pandemic levels and that should allay some of investors’ concerns on business impacts arising from the pandemic. Next, we believe that STE will be able to maintain its dividend payout of 15 S cents and this translates into a dividend yield of 3.99% at S$3.76. On that basis, we think there is minimal downside risk to STE from the current levels and upgrade the stock to a BUY with an unchanged target price of S$4.25.

EARNINGS REVISION/RISK

∙ No changes to our earnings estimates.

VALUATION/RECOMMENDATION

∙ Upgrade to BUY with a target price of S$4.25. We value STE on an EV/Invested Capital basis and have raised our terminal growth rate assumption to 2.7%.

SHARE PRICE CATALYST

∙ Higher vaccination rates in the US.

BUY by UOB Kay Hian Research. Share price closed at $3.81.