Brokers' take: JPMorgan moves ST Engg to 'overweight' with S$4.80 target price

JPMORGAN said in a Thursday report that it would be moving ST Engineering (STE) to an "overweight" rating and a December 2021 price target of S$4.80. Previously, STE was not rated by the investment banking and financial services group.

JPMorgan analysts saw the stock as a "unique play in our coverage universe well-positioned for strong growth". They attributed this to STE's defensibility in a risk-off scenario, its structural growth drivers, as well as a cyclical upturn on the back of improving reopening prospects with STE's maintenance, repair and operations (MRO) exposure focusing on narrow-body aircraft.

Building on STE's strong growth momentum in defence revenue in 2020, the analysts highlighted that STE is well-positioned to capitalise on the government's higher 2021 planned defence expenditure, especially since STE derives one third of its revenue from defence.

Further, the engineering group is looking to grow its international defence business with the recent announcement of it being selected as a partner to participate in the prototype phase for a US Army Cold Weather All-Terrain Vehicle, the analysts said.

They also noted that MRO's 2021 outlook was "boosted by global vaccination roll-out, with near-term recovery supported by person to financial institutions ramp-up and narrow-body aircraft MRO mix".

With domestic and regional short-haul traffic poised to see an earlier recovery, the analysts emphasised that STE's pivot towards narrow-body aircraft MRO work positions it favourably to capture near-term MRO recovery fuelled by global vaccination roll-out and reopening prospects.

Moreover, STE's strong dividend yield play and structural growth drivers offer headroom for expansion, they added.

"While the proposed Cubic acquisition did not materialise, STE remains well-positioned for further value creation and to grow its mobility and transportation systems business under its Smart City initiative," the analysts said.

As at 1.47pm, shares of ST Engineering were trading 0.5 per cent or S$0.02 higher at S$3.92.