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Brokers' take: UOB Kay Hian upgrades ST Engineering to 'buy'; CIMB, Maybank keep 'add'

BROKERS UOB Kay Hian, CIMB and Maybank have issued a "buy" rating on ST Engineering (STE) as they expect the company to record higher earnings from its smart city and marine segments.

CIMB's target price on the counter stands at S$3.80, while UOB Kay Hian has raised its target price to S$4.10 from S$3.60 previously, and Maybank is the most optimistic with a target price of S$4.15.

As at 10.34am on Friday, shares in STE were trading down 1.4 per cent, or five Singapore cents to S$3.42 apiece. This was partly due to Asian stocks tumbling across the board on Friday, after US President Donald Trump announced that he would impose tariffs on Chinese goods, stoking fears of a global trade war.

All things considered, the brokers agree that the firm's smart city solutions will be a key growth driver over the next five years, with STE guiding that its smart city revenue is set to at least double from S$1 billion as at end FY17.

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CIMB believes this target is achievable given the sustained contracts won by STE's electronics division of about S$2 billion per annum, boosted by its advanced electronics and ICT solutions orders since 2014.

Separately, while Maybank agrees that this sector is a key revenue driver, it stated that STE's guidance is higher than its projected revenue growth for the company of about 55 per cent for the whole electronics cluster from FY17 to FY22.

STE's smart city applications encompass three key areas: smart security (cyber and physical security); smart environment (ranging from automated water-metre reading to congestion management); and smart mobility (including the use of autonomous vehicles for public transport and smart robots).

In addition, STE believes that the marine sector is at the tail end of the downcycle and that revenue from this segment should return to previous peak cycle in 2012-13. The company is projecting its marine revenue to recover to S$1.2 billion by 2022, double FY17's revenue of S$638 million.

UOB Kay Hian noted that this recovery in the marine sector is underpinned by two assumptions, namely higher naval spending, and a recovery in the US rig count deployment, which will lead to greater demand for support vessels.

"More importantly, this division needs to accelerate shipbuilding order wins by 2019 to achieve the target. In November, its US subsidiary VT Halter Marine secured a contract from Quality Liquefied Natural Gas Transport LLC for a LNG-powered articulated tug barge. We estimate this contract to be worth US$40 million and could lead to more orders for larger LNG vessels," CIMB said. However, it warned that key risks for its marine sector include cost overrun and execution.

CIMB added that revenues are likely to be boosted by steady growth from its aerospace segment and increased excitement in STE's defence exports. The broker is expecting a group revenue growth of 7 to 11 per cent, should STE's smart city revenue more than doubles to S$3 billion in 2022.

UOB Kay Hian and Maybank are also predicting that profits will grow in tandem with revenue.

Assuming that the company achieves its targeted cost savings of S$150 million by 2020, UOB Kay Hian suggested that STE's net profit could grow at a 7.8 per cent compound annual growth rate (CAGR), or 10 per cent in a bullish case.

Similarly, Maybank forecasts profit growth at 10 per cent CAGR over the FY17-FY22 period, versus a revenue growth of about 7 per cent.