Brokers' take: ST Engg remains a defensive, safe-haven pick, analysts say

ST Engineering remains a defensive, safe-haven pick, amid better-than-expected order wins in the third quarter and a new, leaner organisational structure, according to analysts.

The group on Tuesday announced S$1.7 billion in order wins in Q3, with a particularly strong showing for the electronics division, which clinched S$1.1 billion worth of new orders.

DBS analysts Suvro Sarkar and Jason Sum said in a research note that tendering activity for smart city projects is strong, as governments prioritise infrastructure spending to revive economic growth.

They added that the high certainty of ST Engineering's dividend yield of about 4 per cent provides support. The group's balance sheet remains healthy and operating cash flows were strongly positive in the first half of 2020, boosting confidence in a steady annual dividend payout of S$0.15 per share, Mr Sarkar and Mr Sum said.

OCBC Investment Research noted that ST Engineering has outperformed the broader market since its Aug 14 research note on the stock. The group's share price has appreciated by about 16 per cent compared to the 7 per cent rise in the Straits Times Index.

"The stock has been a beneficiary of the recent news relating to positive developments on the vaccine front - the group's aerospace segment, for instance, should see some light after the Covid-19 outbreak put immense pressure on the global aviation industry's profitability and cashflows," OCBC's research team said.

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Analysts from DBS and CGS-CIMB were also upbeat on ST Engineering's move to reorganise into two main clusters from the new year - commercial, as well as defence and public security, which replace the sector-structure of aerospace, electronics, land systems and marine.

Mr Sarkar and Mr Sum said ST Engineering's new organisational structure should sharpen business focus, improve visibility and resonate better with investors.

Meanwhile, CGS-CIMB analyst Lim Siew Khee said in a separate report that the reorganised commercial and defence and public security clusters could mean leaner structure and better operating leverage.

ST Engineering's cost-cutting measures and revenue recovery will also help to offset the year-on-year relief decline. The group expects to receive more than S$300 million in government relief globally in 2020 and about S$100 million in 2021.

"We like ST Engineering for its diversified business, even within aerospace as when maintenance, repair and overhaul work reduces, passenger-to-freighter work may backfill utilisation ahead," Ms Lim said.

DBS's research team has maintained "buy" on ST Engineering. It raised its target price to S$4.20 from S$3.80 to factor in earnings upgrade for fiscal 2021, as well as higher valuation pegs in line with improved market sentiment related to promising developments on the Covid-19 vaccine front.

CGS-CIMB reiterated "add" on the stock and raised its target price to S$4 from S$3.76 as ST Engineering's reorganised structure will allow it to better execute its global growth in smart city and international defence business.

Meanwhile, OCBC maintained "buy" on ST Engineering. It also raised its fair value on the stock to S$4.30 from S$3.90.

Shares of mainboard-listed ST Engineering were trading 0.8 per cent or S$0.03 higher at S$3.87 as at 11.32am on Thursday.