Brokers' take: UOBKH upgrades ST Engineering to 'buy' as share price weakens

UOB Kay Hian has upgraded its call on Singapore Technologies Engineering (ST Engineering) S63 to "buy" with an unchanged S$4.25 target price, as research house believes now is an appropriate time to revisit stock given its post-results price decline.

In a report on Tuesday, analyst K Ajith noted that ST Engineering's shares have fallen 7.8 per cent as of its Monday closing price of S$3.76.

This could be partly due to concerns that the group's H2 FY2021 earnings could be weaker half-on-half, said the analyst, due to a slowdown in US airline seat capacity as well as Covid-19 vaccine hesitancy.

He nonetheless remains optimistic on its stock in the medium-term in view of recently secured contracts and orders, which he thinks will lead to a gradual pick-up in aerospace earnings by mid-2022.

In his report, Mr Ajith highlighted the defence and public security (DPS) business for its resilience and as an emerging growth area, as it accounted for the highest improvement in base operating earnings among other divisions in H1 FY2021.

"Aside from naval contracts for the US Navy, ST Engineering is a key contractor for Singapore's public security and is also involved in the deployment of security robotics at key infrastructure installations. Given the early and successful adoption in Singapore, we believe that ST Engineering will be able to expand such robotics solutions outside Singapore," said the analyst.

He added that a further boost to earnings could also come from this segment if the group and its US defence partner, Oshkosh Defence, are selected to produce cold-weather all-terrain vehicles for the US army by Q4 of 2021 or early-2022.

Mr Ajith is also expecting ST Engineering's urban solutions and satcom segment to be boosted from a lift maintenance and monitoring solutions contract, which the group announced through its website on Monday. "While details were scarce, we take it that the contract applies to lifts at public housing (estates)," he said.

In view of ST Engineering's record orderbook of S$16.8 billion as at end-Q2 FY2021 and a 4 per cent dividend yield, the analyst concluded there is "minimal downside risk" to the stock from its current levels.

Shares of the group were trading S$0.03 or 0.8 per cent higher at S$3.79 as at 10.26am on Tuesday.

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