ST Engineering

ST Engineering | Buy

Target price: S$4.15

March 12 close: S$3.43

Maybank Kim Eng, March 12

After three lacklustre years due to tough market conditions and restructuring costs, growth catalysts are falling in place. Aerospace MRO (Maintenance, Repair & Overhaul) is witnessing green shoots from the recovery in global trade, some capacity rationalisation and growth in the global aircraft fleet while recent acquisitions hold growth promise.

Land Systems, unshackled from the prior drag of China units, holds growth promise in the autonomous mobile robot market with its Aethon (Unlisted) acquisition. Prospects for Marine remain challenging in the near-term but cost rationalisation has been largely completed and an oil price recovery may alleviate the situation sooner than expected.

STE's core-value proposition is offering tailored customer solutions using its deep pool of engineering and technological expertise in multiple sectors. Management's focus on forging greater integration across what have historically been silo-like divisions is a big positive.

This initiative could surprise on the upside on revenue (cross-selling) and cost synergies (central procurement, standardised systems) in coming 2-3 years.

We raised our target price by 31 per cent to S$4.15 due to forecast revisions and the change in our valuation methodology to discounted cash flow (previous target price based on 18 times FY17 earnings per share) at 8.1 per cent WACC (weighted average cost of capital). The top two risks to our forecasts are a material downturn in aerospace and further write-offs in marine.

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