Citi Research analyst Jame Osman has kept his “sell” call on Singapore Technologies Engineering (ST Engineering) as he sees consensus expectations for the FY2023 ending Dec 31 as “overly bullish” despite the near-term risks.
“ST Engineering’s share price has declined [some] 8% over the past one year while consensus earnings estimates for FY2023 – FY2024 have seen downward revisions of 9% to 11%,” he writes.
In his report dated April 11, Osman believes that the group’s strong narratives such as a strong order book and the recovery in air travel has already been priced into ST Engineering’s share price. That said, he also remains cautious over the potential industry headwinds such as cost inflation, shortage in skilled labour, higher interest cost, as well as integration risks from its recent acquisitions.
“Ahead, we believe [ST Engineering’s] recent contract wins bode well for medium-term business growth with revenue visibility underpinned by the company’s strong order book. However, we retain our cautious view mainly as we believe market expectations for near-term earnings growth appear too optimistic and may not adequately discount risk factors,” he says.
Furthermore, while the group’s “sustainable” dividend yield of around 4% offers support, its current valuations remain unattractive compared to its historical mean, he adds.
In ST Engineering’s commercial aerospace segment, Osman is estimating its revenue to grow by 12% y-o-y in the FY2023, which is driven by its continued ramp-up of its passenger-to-freighter (PTF) programme as well as its recovery in its core maintenance repair and overhaul (MRO) and MRA Systems businesses. The analyst expects the segment’s ebit to improve by 50 basis points (bps) y-o-y as he sees factors such as wage inflation and component shortage risks progressively receding.
The group’s Urban Solutions & Satcom business is expected to “remain a drag” due to the slowdown in demand, but it may be offset by its smart mobility businesses which have gained traction from the resumption of government tenders, as seen by the recent contract wins in Taiwan. For this segment, Osman has forecasted its revenue to grow by 5% y-o-y with a margin expansion of three percentage points y-o-y.
“Our forecasts include TransCore integration costs of [around] $10 million [a] year and higher interest expenses from TransCore-related funding as guided by management,” he writes.
ST Engineering’s defence & public security may see a revenue decline of 1% y-o-y in FY2023 after divesting its US marine business. That said, the segment may see a 1.6 percentage point improvement in its margins to 10%. In addition, Osman expects the contract win for ST Engineering’s multi-role combat vessels (MRCV) from the Singapore Navy to provide revenue visibility for the medium-term. The contract win was valued at around $1.5 billion.
Overall, the analyst has lowered his earnings per share (EPS) estimates by 7% to 8% for the FY2023 to FY2024 after reducing his margin assumptions and introducing his FY2025 estimates. He adds that his revised forecasts are currently below consensus estimates by 7% to 9%.
That said, Osman has raised his target price on ST Engineering to $3.35 from $3.26 after rolling over his earnings base to FY2023 and still applied to a target multiple of 20x.
Shares in ST Engineering closed 7 cents lower or 1.88% down at $3.65 on April 12.
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