Analysts Divided on ST Engineering's Future

In a recent development regarding ST Engineering's financial outlook, analysts find themselves split on the company's prospects. While banks like Citi Research, Morningstar, and RHB Bank Singapore still hold positive views, Maybank Securities analyst Krishna Guha has downgraded his rating to "hold," reducing his target price from $4.80 to $4.70.

Guha cites a slowdown in order book growth as a primary concern. "Although ST Engineering is executing well overall, the deceleration in order book growth is likely to impact ebit margins unless this trend is reversed," he commented. Moreover, he noted that the recovery of the urban solutions sector is progressing slower than anticipated.

In Guha's report dated November 19, he identified a "mixed operating trend" within the company, highlighting that while the defence and public security divisions are fueling revenue growth, there's a noticeable decline in momentum from both the commercial aerospace and urban solutions segments. The company reported a 3.6% quarter-on-quarter dip in its order book, which now stands at $26.9 billion, with fluctuations heavily influenced by the weak US dollar. In the third quarter of FY2024, ST Engineering secured new orders totaling $2.2 billion, with significant wins in engine and airframe maintenance as well as in digital cybersecurity and ammunition within their defence and public security business. Urban solutions benefited from contracts in smart transportation and back-office solutions, although fewer than expected.

Despite the mixed signals, Morningstar's Lorraine Tan has raised her fair value estimate for ST Engineering, maintaining a "four star" rating and setting the new target at $5.25, up from $4.72. Tan emphasized the continued strong performance of the defence and public security segments, which contributed to a 14% year-on-year revenue growth. She anticipates a full-year revenue increase in the teens but also acknowledges a potential slowdown in passenger-to-freight conversions, largely due to airlines delaying the retirement of older aircraft amidst ongoing delivery delays.

Tan's assessment predicts that the decline in PTF activities is a temporary setback, with forecasts for ST Engineering's earnings per share (EPS) showing a robust 14.4% compound annual growth rate from FY2023 to FY2028. "The current price level presents a reasonable opportunity for investors," she noted.

Citi's analyst Luis Hilado also maintains a "buy" rating with a target price of $5.12, highlighting that ST Engineering's revenue in the first nine months of FY2024 is consistent with expectations. While he echoed concerns about slowing order acquisitions in commercial aerospace and defence, he pointed out long-term drivers for demand, including a planned 30% expansion of hangar capacity by FY2026.

On the other hand, RHB analyst Shekhar Jaiswal remains firmly optimistic, continuing his "buy" call with the highest target price of $5.32 among his peers, underscoring his belief that profit momentum will remain strong.

As of the current trading session, ST Engineering's shares have seen a 3.15% rise, hitting $4.59, indicating market resilience despite the current mixed analyst sentiments. Investors and analysts alike will be watching closely to see how ST Engineering navigates these challenges and opportunities in the coming months.

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