ST Engineering

Price target:

RHB Group Research “buy” $4.80

A defensive stock amid uncertain economic outlook

RHB Group Research Shekhar

Jaiswal has kept a “buy” rating on ST Engineering with a target price of $4.80.

For 1QFY2022 ended March,

ST Engineering reported in-line revenue of $2 billion, some 13% higher y-o-y, with all segments — commercial aerospace (CA), urban solutions and satcoms (USS) and defence & public security (D&PS)— booking growth.

ST Engineering’s CA revenue rose 22% y-o-y to $674 million, while USS revenue increased 12% y-o-y to $297 million. Within the CA segment, its airframe maintenance, repair and overhaul (MRO) business has seen an almost full recovery from 80% capacity utilisation in 3QFY2021.

Demand for passenger-to-freighter (P2F) services also remains strong — with Airbus A330 P2F conversion slots booked until 2026 and the A320/A321 P2F conversion slots booked until 2025.

“Increasing the scale of operations should boost its P2F profitability, as ST Engineering will double its P2F aircraft induction this year,” says Jaiswal, who is also expecting nacelle production to ramp up for the rest of 2022.

The D&PS segment’s revenue was $1.1 billion, up 9% y-o-y, at 25% of Jaiswal’s 2022 estimate.

For 1QFY2022, ST Engineering reported $2.4 billion worth of order wins in 1QFY2022, up 54% y-o-y.

Additionally, the consolidation of recent acquisition TransCore from March 17 onwards contributed $1.6 billion of orders to ST Engineering’s total orderbook, at a record $21.3 billion.

In addition, ST Engineering issued US$1 billion ($1.37 billion) bonds, with US$700 million due in 2027 and US$300 million due in 2032 and has managed to lower its weighted average cost of borrowing undertaken to acquire TransCore to 1.8% per annum, due to the favourable settlement of Treasure Locks gains of US$91 million, which will be amortised over the period of the bonds. “We remain upbeat on it delivering defensive growth, aided by a gradual revival in the aerospace business,” writes Jaiswal. —