Brokers’ take: Maybank initiates ‘buy’ on ST Engineering amid aerospace sector recovery

MAYBANK Securities on Tuesday (May 31) initiated coverage on ST Engineering (ST Engg) with a “buy” call and a target price of S$4.75. 

The research team expects the recovering aerospace landscape, as well as the company’s recent acquisition and contract wins, to provide revenue visibility for the company. 

The target price implies a potential upside of 14.5 per cent from Tuesday’s trading price of S$4.15 as at 2.52 pm. The counter was up S$0.09 or 2.2 per cent at the time.  

The research team estimates that demand for urban and satellite communications solutions could drive a compound annual growth rate of 9.9 per cent from FY2021 to FY2024. New drivers include smart-city and information and communications technology solutions. 

Maybank said that ST Engg’s acquisition of TransCore has growth potential in smart city solutions. Rising defence spending may also raise international sales “at a robust pace”. 

Noting that the aerospace maintenance, repair and overhaul sector is witnessing some recovery as international borders open, Maybank analyst Kelvin Tan said that rising demand for freighter aircraft should see an uptick in passenger-to-freight conversion contracts. 

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ST Engg’s significant contract wins and record-breaking FY2021 order book of S$19.3 billion will also provide good revenue visibility, Maybank said, adding that this will also promise a sustainable dividend yield on 2.5 per cent. 

The group’s strategy to better integrate ST Engg’s various divisions could also be materially positive. Tan foresees pre-tax profit margin to increase from 9 per cent in FY2021 to 10.2 per cent by FY2024, mostly on efficiencies in smart cities initiatives coupled with a strong order book growth of 15 per cent year on year. 

“We also see a potential surprise to the upside from revenue (cross-selling) and cost (central procurement, systems standardisation) synergies in the coming 2-3 years,” Tan said. 

That being said, Maybank’s research team is “prudentily below consensus” when it comes to its estimates on ST Engg’s FY2022-24 net profit. This is due to its concerns on a slower reopening of Asia’s aviation sector and the global chip shortage, which could impact the sale of smart-city solutions.