Brokers' take: RHB optimistic on ST Engg's 2021 earnings recovery, reiterates 'buy'

RHB on Monday said it remains optimistic on Singapore Technologies Engineering's (ST Engineering) 2021 earnings recovery, aided by order delivery normalisations across all business segments.

The mainboard-listed engineering conglomerate's 2020 earnings came in slightly ahead of expectations for RHB and were in line with the forecasts of research teams from CGS-CIMB and OCBC.

OCBC maintains its fair-value estimate of S$4.30 on ST Engineering, as well as its "buy" call. The group's FY2020 net profit of S$521.8 million was 4 per cent higher than OCBC's forecast of S$501 million.

RHB reiterates "buy" on the stock, with a lowered target price of S$4.25 from S$4.40. It said a year-on-year higher order backlog, robust balance sheet and ability to generate positive free cash flow and sustain dividend payments support its call.

ST Engineering's order book value stood at S$15.4 billion as at end-December 2020, of which S$5.3 billion is expected to be delivered in 2021.

RHB believes the recently announced new organisation structure will support profit growth beyond 2021, with near-term positive catalysts coming from contract win growth, recovery in the commercial aerospace unit, and higher margins.

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However, RHB lowered its 2021 profit forecast for ST Engineering by 3 per cent to account for the shortfall in cost support. ST Engineering's confidence in generating S$180 million in cost reduction will only partially offset the S$250 million gap left by the loss of government grants this year, the research team noted.

Meanwhile, CGS-CIMB said ST Engineering fared better in its 2020 earnings relative to its peers in the industrial/conglomerate space, although it was largely helped by government grants.

"We like the diversification of the group, disciplined cost management and strong return on equity," CGS-CIMB said.

It reiterates "add" on ST Engineering with a target price of S$4. It has cut its FY2021-22 earnings per share forecast by 8-13 per cent to account for weakness in the group's marine unit as well as slower recovery in aircraft maintenance, repair and operations for its aerospace division.

Shares of ST Engineering closed at S$3.82 on Monday, up 1.87 per cent.