Brokers' take: RHB raises target price on ST Engg to S$4.50, maintains 'buy' call

RHB has raised its target price on ST Engineering (STE) to S$4.50 from S$4.25 previously, while maintaining its "buy" call.

In a report on Monday, the research team cited STE's "high order book with more than two years of revenue visibility, its ability to sustain dividend payments, and potential growth momentum from defence business and Smart City initiative" as reasons for supporting the call on the stock.

This comes after STE last week was awarded a contract in partnership with Oshkosh Defence to produce prototypes for the US Army's cold weather, all-terrain vehicle. Currently, defence accounts for close to one-third of STE's revenue.

Despite the risk of economic recovery stalling if the Covid-19 pandemic is not contained, RHB analyst Shekhar Jaiswal highlighted that STE's "well-diversified business will find interest with defensive investors in a risk-off situation".

He also noted that for growth-seeking investors, a stronger economic recovery could further boost STE's earnings through "higher order wins and earlier-than-expected recovery in its aviation maintenance, repair and operations business".

According to the report, STE's order backlog stood at S$15.4 billion, which implies a book-to-bill ratio of 2.2 years as at end-2020. Of this amount, S$5.3 billion of the order book value is expected to be delivered in 2021, an equivalent of 71 per cent of RHB's revenue estimate, Mr Jaiswal said, noting this implies "strong order wins and a high outstanding order book".

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Last month, STE's proposed buyout of New York-listed defence and transport technology firm Cubic Corporation fell through, with Cubic accepting Veritas Capital and Evergreen Coast Capital's proposal instead. Although the proposed acquisition did not materialise, Mr Jaiswal remains optimistic about STE's earnings recovery in 2021, "aided by normalisation of order delivery across business segments".

STE shares fell 0.5 per cent or S$0.02 on Monday to close at S$3.97.