Broker's take: DBS downgrades ST Engg to 'hold' on limited upside potential

DBS Group Research has downgraded Singapore Technologies Engineering (ST Engineering) to "hold" on limited upside potential. It also lowered its target price to S$3.40 from S$4.60.

ST Engineering shares were trading S$0.01 or 0.3 per cent higher at S$3.28 as at 10.51am on Monday.

With global lockdowns in place aimed at tackling the Covid-19 crisis and the novel coronavirus's negative impact on the global economy, new order wins for ST Engineering could slow down. Existing order deliveries also risk getting deferred, said DBS analysts Suvro Sarkar and Jason Sum in a research note on Monday.

ST Engineering's aerospace and electronics segments, in particular, will face higher revenue pressure in the near term due to larger exposure to commercial customers.

Also, the aerospace division has significant exposure to countries with vast domestic aviation markets such as the US and China, the note added.

"The aviation MRO space will be the biggest drag on earnings, as airlines look to defer maintenance spending, flying hours are reduced and new aircraft deliveries slow down," Mr Sarkar and Mr Sum said.

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DBS Group Research expects ST Engineering's group earnings to decline around 14 per cent in fiscal 2020, still faring relatively better than most of its peers. The research team has cut the company's FY2020 earnings by 16 per cent and FY2021 earnings by 18 per cent.

That said, ST Engineering's dividends are unlikely to be affected despite the projected fall in earnings. The company's balance sheet remains strong, while funding costs stay low. This will continue to support the share price, Mr Sarkar and Mr Sum added.

Meanwhile, RHB Research and CGS-CIMB have maintained their calls on ST Engineering and lowered their target prices for the company.

RHB is maintaining "buy" with a lowered target price of S$3.90 from S$4.15 previously. RHB analyst Shekhar Jaiswal said ST Engineering should deliver a profit and positive free cash flow in 2020 with its earnings supported by the defence business.

CGS-CIMB is keeping its "add" call on ST Engineering, cutting its target price to S$3.65 from S$3.86 to account for lower growth in the company's electronics segment.