Record order book of contracts to accelerate earnings growth
ST Engineering, with a big proportion of “buy” or equivalent calls from the street, is a relatively safe, yet compelling choice. The company suffered from a stretch of overall topline and earnings stagnation, but over the last couple of years, it made a couple of significant acquisitions, which complements its existing aerospace and electronics businesses well.
The company enjoyed an unexpected lift when geopolitical tensions heightened with the recent assassination of an Iranian general by the US. As a company with around half its revenue from defence and related projects, ST Engineering stands to gain, even if not from actual new orders, but from the bullish mood of its investors.
Coupled with steady contract wins, the company is now sitting on a record-high order book of nearly $16 billion, to be delivered over the coming two years or so. Analysts are expecting ST Engineering’s earnings growth to accelerate to double-digits.
By contrast, the Straits Times Index component stocks – of which ST Engineering is one of them – is seen to record earnings growth of 3.9% for 2020. “We expect its share price to outperform the STI,” states RHB analyst Shekhar Jaiswal, who has a buy call and $4.55 target price on the stock.
In addition to its earnings growth, ST Engineering is also favoured by investors for its relatively generous dividend payout. UOB Kay Hian analyst K Ajith believes the company will maintain its 15 cents per share annual payout for FY2019, but with improved earnings growth from newly-acquired businesses, shareholders can expect higher dividend for the subsequent years.
When ST Engineering completed the acquisition of the Middle River Aerostructure Systems in early 2019 for US$630 million, it was the largest acquisition made by the company in a decade. MRAS, which used to be part of the leading US conglomerate General Electric, makes engine nacelles, and this is a business which complements ST Engineering’s existing aircraft maintenance and refitting business, which is one of the company’s largest business activity.
ST Engineering’s other business units such as its marine and land systems units are also in the process of fulfilling major contracts for customers such as new vessels for the US Coast Guard, and a fleet of next generation armoured fighting vehicles for the Singapore Armed Forces, called the Hunter. However, as per normal practice, the size of the SAF contracts were never publicly disclosed.
That aside, the company is also actively pursuing new contracts in so-called Smart Cities systems, not just within Singapore, but elsewhere in the region. For example, it has a “smart lamp post” pilot project in Hong Kong. Another major acquisition made recently by ST Engineering was that of Newtec Group, a satellite communications company based in Belgium. That deal cost the company 250 million euros, or some $383 million, and will help open up new markets for the company.
In addition to contract wins from its existing divisions, ST Engineering has around two years ago set up a new ventures and enterprises unit, tasked to look out for new, complementary businesses and technologies, such as in health and medical, which the company can then bring on board to drive new growth.
ST Engineering closed at $ 4.11 on Jan 15, up more than 18% since the beginning of 2019. At this level, the company is valued at 24 times historical earnings.