Brokers' take: UOB Kay Hian upgrades ST Engineering to 'buy' with S$3.80 target

UOB Kay Hian has upgraded Singapore Technologies (ST) Engineering to a "buy" on expectations that the diversified engineering group's third-quarter net profit could climb by at least 50 per cent.

Analyst K Ajith is however keeping his target price of S$3.80. ST Engineering shares traded at S$3.48 as at 12.06pm on Friday, up 0.6 per cent or 2 Singapore cents on the day.

"Most of the known negatives are reflected in the price, but not potential positives," analyst K Ajith wrote in a note on Friday, adding: "Post Q3 FY17 results, we believe the stock will outperform as investors will look ahead and focus on enhanced capabilities and possibly a greater share of US defence ship repair work."

Mr Ajith said that ST Engineering's third-quarter profit should increase by at least 50 per cent partly due to S$54 million of provisions at ST Kinetics in the year-ago period that depressed earnings last year. The group will also probably take a lower quarter-on-quarter provision for its shipbuilding division, while marine unit VT Halter Marine could gain from higher defence-related ship repair contracts. US corporate tax cuts, if any, will also benefit ST Engineering.

The analyst noted that ST Engineering's stock price has declined after the company's second-quarter results were announced and following management's guidance that second-half profit before tax would be "comparable".

"For Q3 FY17 and nine-month FY17, we will be looking out for the extent of bad debt provisions, trade receivables as well as magnitude of ship building revenue and profit before tax decline," the analyst wrote. "Any improvement in these data points will likely lend confidence in the stock."