Phillip Securities has initiated coverage on ST Engineering : S63 0% with a “buy” recommendation and target price of S$4.50, as it expects defence spending to increase amid heightened geopolitical tensions and cybersecurity threats.

Singapore had stepped up defence and security spending in FY2021 and FY2022. The research team expects this amount to rise further in FY2023, providing revenue visibility for the mainboard-listed technology and engineering group.

The group’s defence and public security segment won S$5.2 billion in contracts in the first half of 2023, which was 20.9 per cent higher than that for the entire FY2022.

The recovery in the aviation sector will also boost demand for the group’s maintenance, repair and operations (MRO) business, as well as aircraft parts, the research team noted.

“As Asian air travel gains pace from H2 2023, ST Engineering’s MRO bases in China, Vietnam and Singapore are poised to gain from higher demand for MRO and components,” said research manager Peggy Mak.

Furthermore, Transcore – a US transportation company acquired in 2022 – is on track to be earnings accretive. In June, Transcore received a “notice to proceed” for its New York Congestion Pricing project, slated for completion in the second quarter of 2024.

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“We think this project could lead to more opportunities in other US cities.”

Mak added that contributions from this project, together with the fading of transaction and integration expenses, could put Transcore on the road to being earnings accretive from H2 2023.

In its H1 financial results release, ST Engineering said it expects Transcore to be earnings accretive in 2024, supported by project deliveries weighted in the second half of this year.

Phillip Securities’ target price of S$4.50 implies a 16.3 per cent upside from ST Engineering’s last traded price of S$3.87 as at 3.30 pm on Tuesday (Sep 26). The counter was up 0.3 per cent or S$0.01 at the time.