RESEARCH houses have raised their target price for ST Engineering : S63 0% following the release of the company’s half-year financial statement. 

On Friday (Aug 11), Citi Research upgraded its call on the technology and engineering group to “neutral” from “sell”, while raising its target price to S$3.76 from S$3.35. 

The company’s better profit margin in its core business segments was the main reason for the upgrade, said analyst James Osman.

Although the company may still be dragged down by near-term operational costs due to factors such as labour shortages and supply chain bottlenecks, Osman is positive that the company’s topline momentum has finally translated into improved operational leverages in its core businesses. 

Expected earnings per share (EPS) for FY2023 was raised by 11 per cent to reflect the better margin, driving up the target price. 

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The analyst also increased forecasted EPS by 10 per cent for FY2024, and by 5 per cent for FY2025, as he expects the improvements in margins to be sustainable. 

In addition, the company’s cost rationalisation of underperforming assets and use of capital recycling to manage gearing levels were cited as further indications of a “better risk-reward balance”. 

A strong order backlog of S$27 billion contributed to the company’s revenue visibility for the next two years, although this factor has already been considered in previous ratings. 

Similarly, RHB Research raised its target price on ST Engineering to S$4.50 from S$4.25 while maintaining its “buy” call. 

This implies a potential upside of 17.5 per cent from the counter’s last trading price of S$3.83 as at 12.08 pm on Monday. Shares of ST Engineering were up 1.3 per cent or S$0.05 at the time. 

The target included a 6 per cent ESG premium over the fair value of S$4.25 as RHB assigned ST Engineering a high ESG score of 3.3 out of 4. 

RHB also increased its profit forecast for FY2023 to FY2025 by 3 to 7 per cent. 

“RHB expects the recovery of the commercial aerospace segment and strength of the defence and public security segment to continue. Despite a weak H1 2023 for urban solutions and satcom, ST Engineering sees a very strong H2 2023 for the segment,” said analyst Shekhar Jaiswal.

“We expect ST Engineering to deliver an 18 per cent profit compound annual growth rate in 2022–2025,” he added. 

While ST Engineering expects its total borrowing to drop from the current high of S$6.2 billion by the end of FY2023, RHB is less confident about the decrease in debt level in the short term. Nevertheless, RHB agreed that the company’s debt will “gradually decline” from FY2023 to FY2025.

Both Citi and RHB estimated a dividend yield of 4.2 per cent for FY2023.