Brokers' take: CGS-CIMB raises ST Engineering target price as aerospace sector recovers

CGS-CIMB has maintained "add" on Singapore Technologies (ST) Engineering and increased its target price to S$4.41 from S$4 in a report released on July 3.

Analyst Lim Siew Khee attributed this to the recovery of the aerospace sector as Airbus gradually ramps up production of aircraft and US domestic travel recovers to pre-pandemic levels.

In the report, Ms Lim noted that the US Transportation Security Administration (TSA) expects summer travel volumes to rise, while average airport throughput in the US has increased to 75 per cent of pre-pandemic levels. Some airports are even seeing passenger travel volumes exceed 2019 travel volumes.

As such, she expects demand for airframe maintenance, repair and overhaul (MRO) services to pick up in the US, contributing to an increase in the engineering conglomerate's earnings per share between FY2021 and FY2023 by 5 to 6 per cent on stronger revenue and margins from ST Engineering Commercial Aerospace.

"Relative to Singapore peer SIA Engineering which depends predominantly on Singapore Changi Airport's throughput and SIA load factor, ST Engineering's presence in the US is the key differentiating factor for an earlier recovery to pre-Covid-19 levels, in our view," Ms Lim said, adding that she expects ST Engineering Aerospace's revenue to reach 86 per cent of pre-pandemic levels in FY2021 on the back of global operations in US, Europe and China.

Furthermore, ST Engineering Commercial Aerospace's production of engine nacelle under its US subsidiary MRA Systems is also set to recover as Airbus gradually ramps up its monthly production of A320 aircraft, Ms Lim said.

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In May, Airbus increased A320 aircraft target production to 45 per month by Q4 of 2021, up from the current 40 per month, and 64 per month by Q2 of 2023.

In a business update in May this year, the group announced that its order book stood at S$15.7 billion in March 2021, a level higher than pre-Covid-19 figures. Ms Lim expects the group's order book to breach S$16.5 billion by the end of the FY2021.

Aside from commercial aerospace, Ms Lim also expects the group to grow its presence in international defence. She noted that ST Engineering's US VT Halter Marine arm was awarded a US$149 million contract from the US Department of Defense for the design and construction of an oceanographic survey ship in June.

Partnering US tactical vehicle manufacturer Oshkosh Defense, ST engineering is also competing with BAE Systems to supply two prototypes for US Army Cold Weather All-Terrain Vehicle (CATV). The US Army will issue a follow-on production contract for up to 200 CATVs and US$1.6 million per vehicle in FY2022 to the successful bidder.

Despite the smaller contract size, Ms Lim believes that it would build ST Engineering's "presence and reputation in the international defence space".

An investor day in the second half of 2021 could also fuel investor interest and shed some light on the group's reorganisation into two main clusters: commercial, and defence and public security, she said.

The group had plans in 2018 to double its annual revenue by 2022 from S$1 billion at the time. Since then, progress has been made over the years with smart city revenue rising to S$1.4 billion in 2019, even as the Covid-19 pandemic could yet disrupt the group's revenue targets.

"Nonetheless, we think it is timely for the group to reorganise segments and resources preparing for a post-Covid-19 recovery," Ms Lim said.

ST Engineering’s shares closed up 1.30 per cent at S$3.90 on Monday.