ST Engineering - UOB Kay Hian 2021-09-14: Looking More Attractive Post 7.8% Share Price Decline & New Order Wins


ST Engineering - Looking More Attractive Post 7.8% Share Price Decline & New Order Wins

  • It is an appropriate time to relook at ST Engineering, following the 7.8% post results share price decline.
  • While there is a concern about the pace of recovery in commercial aviation, ST Engineering continues to secure new PTF orders with a backlog till 2025. ST Engineering has also secured a rail maintenance contract as well as a sizeable but undisclosed lift maintenance and monitoring solutions contract. At the current level, ST Engineering also offers an attractive dividend yield of 3.99%.
  • Upgrade ST Engineering To BUY with a target price of S$4.25.

Opportunity to accumulate post share price pullback; upgrade ST Engineering to BUY.

  • ST Engineering's share price has declined by 7.8% post results, partly due to concerns that 2H21’s earnings could be weaker h-o-h, amid a slowdown in US airline seat capacity as well as vaccination hesitancy, particularly in the US. However, looking beyond 2022, there are reasons to be optimistic.
  • First, on the commercial aviation front, ST Engineering had announced that it had secured two engine maintenance contracts, one of which is an exclusive 5-year contract with Alaska Airline, set to commence in 2022.
  • Next, ST Engineering also announced last month that its subsidiary, EFW had secured new Airbus A320/A321 Passenger-to-Freighter (P2F) orders and options from BBAM leasing, with work to be carried out through 2025 and with options to add further conversion slots to 2026. This holds scope for gradual pick-up in aerospace earnings by mid-22.

Defence and Public Security (DPS) business is more resilient and is also a growth area

  • This division accounted for 68% of ST Engineering's revenue in 1H21 and accounted for the highest partner, Oskosh Defence are selected to produce 200 Cold Weather all-terrain vehicle (CATV) for the US army. Two prototypes are currently being evaluated and an expected by 4Q21 or early-22.

S$180m rail systems and communications contract win in Singapore pushes towards more greener buses with EV charging for SMRT buses.

  • The S$180m contract to renew and modernise the communications systems technology would lead to a 50% fuel cost savings per km.

Urban solutions and satcom segment will receive a boost from lift maintenance and monitoring solutions contract.

  • Yesterday, ST Engineering announced that its AGIL Smart Lift monitoring solutions will be implemented across Singapore. While details were scarce, we take it that the contract applies to lifts at public housing. The solutions allow 24/7 remote lift status monitoring and diagnostics via smart sensors and provide predictive analytics of lift components to technicians via an app. ST Engineering did not disclose the size of the contract.

Record orderbook of S$16.8b and 4% dividend yield should limit downside risk.

  • ST Engineering’s orderbook as at end-2Q21 was higher than pre-pandemic levels and that should allay some of investors’ concerns on business price of S$4.25.

ST Engineering - Recommendation

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-09-14
SGX Stock Analyst Report BUY UPGRADE HOLD 4.250 SAME 4.250