Brokers’ take: CGS-CIMB lowers ST Engineering target price on higher interest rates

Ilyas Salim
Published Thu, Oct 6, 2022 · 12:14 PM

CGS-CIMB has cut its target price on ST Engineering (STE) from S$4.53 to S$3.95 after the US Federal Reserve raised its key interest rate by 0.75 per cent on Sep 21, with further hikes expected in the near term.  

In a report on Wednesday (Oct 5), analyst Lim Siew Khee said she expects the defence and engineering group’s earnings through FY2023-2024 to be negatively impacted by the higher interest rates. 

After factoring in a higher risk-free rate and cost of debt numbers, the new blended target price implies that the group’s shares, at the current price of S$3.52, is trading at 18 times FY2023 price-to-earnings ratio – 2 standard deviation points below the stock’s 6-year historical mean. 

Lim has lowered her estimates for STE’s FY2023-2024 earnings per share (EPS) by 6.2-8 per cent, to an overall 18 per cent EPS growth for the same period. 

This is because she foresees the company’s floating rate debt, the bulk of which comprises short-term commercial papers, will incur higher rollover risks due to the interest rate hikes. 

She also expects a higher weighted average interest rate in FY2023 for the company at 2.9 per cent (compared with 2.2 per cent as guided in H1 2022), as she believes the company will issue longer-term lower-yield bonds to refinance some of its commercial papers in FY2023.


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“We expect the negative impact to be cushioned slightly by the treasury lock gains held in STE’s balance sheet reserves. Recall that STE recorded US$91 million in treasury lock gains in April 2022, with US$32 million expected to be used to reduce the yield on future bond issuances,” said Lim. 

The research house nevertheless continues to rate STE at “add” for the counter’s defensiveness, due to its record-high order book of S$23.6 billion, as well as its recent consolidation of US-based transportation technology firm TransCore. 

Lim also highlighted STE’s strong net gearing position this cycle. In the analyst’s view, the market has higher expectations for the group’s growth going forward as STE has typically outperformed the MSCI Singapore index by about 5 per cent over the past 10 years, and 9 per cent in the past 20. 

Shares of STE : S63 0%were trading 0.3 per cent or S$0.01 lower at S$3.51 as at 11.30 am on Thursday.



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