Brokers’ take: RHB cuts ST Engineering target on rising capex; positive on debt profile

RHB on Monday (Oct 9) lowered its target price on ST Engineering on expectations that capital expenditure from the defence and engineering group’s new airframe maintenance facility would reduce near-term cash flow.

Its target price is now S$4.45 from S$4.50, implying a potential upside of 17 per cent from the counter’s last trading price of S$3.80 as at 3.02 pm. Shares of ST Engineering were down 1 per cent or S$0.04 at the time.

On Sep 23, the group said the new facility will have an estimated development cost of S$170 million, which includes construction and equipment costs.

The rise in capex impacted RHB’s discounted cash flow fair value estimate, even as the research team sees potential upside to fair value from the group’s improving debt profile.

ST Engineering had expected its total borrowings to fall to mid-S$5 billion in December 2023 from S$6.2 billion in June 2023 from operating cash flow and aviation asset sales to joint ventures.

RHB estimated that an additional decline in debt levels could translate into a 2 to 3 per cent uplift in its FY2023-25 earnings estimates.

The new airframe maintenance facility could also add to ST Engineering’s earnings in FY2026, provided the group’s maintenance, repair and overhaul (MRO) operations at Paya Lebar does not scale back anytime soon.

The group expects the new facility – located next to the Changi Airfreight Centre in Changi Creek – to add 1.3 million man-hours annually when fully operational. This is 10 per cent of ST Engineering’s current global airframe MRO capacity. 

RHB has maintained its “buy” call on the stock. It believes investors should hold the stock in their portfolios given its “excellent earnings growth and guaranteed dividend payments”.

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The group’s all-time high S$27.7 billion order book as at Jun 30, 2023, also offers revenue visibility for almost three years, the research team added.