Strong Balance Sheet to Combat Rate Hikes

• We evaluated the impact of aggressive rate hikes to ST Engineering (SGX:S63)’s float rate borrowings would be minimal as we lower our earnings forecast by just 2- 3% considering ST Engineering’s revenue outlook remains positive as the aviation industry continues to recover and strong balance sheet reserve of US$32m will reduce yield for future bond issuance.
• Under our enhanced ESG review, ST Engineering scores an above-average 58 points, which we think could be improved with more transparency.

Trimming ST Engineering's Earnings Forecasts to Factor in Higher Rates

• As the cost of debt is rising, funding the acquisition of TransCore remains a key concern among investors. Noted that bulk of ST Engineering’s floating-rate debt is short-term commercial paper (CP) with S$2.8b outstanding. We believe CP will face pressure from rising interest rates as the short duration exposes it to rollover risk upon maturity. As such, we revise up our FY22-24E interest expense forecast for ST Engineering by 15-25% and lower our net profit forecasts for ST Engineering by 2-3%.
• As at Apr’22, ST Engineering still holds US$32m in reserves on its balance sheet. We think ST Engineering will refinance a portion of its CP in FY23E by issuing longer-duration bonds with a lower yield.

More Disclosures Would Improve ESG Performance

• ST Engineering has an established an ESG framework and internal policies, but could further improve its quantitative “E” metrics. The company’s targets include reducing carbon emissions by 50% by 2030 (against 2010 baseline).
• We think a higher degree of transparency with a more comprehensive plan towards Scope 3 emission and waste reduction would enhance its overall ratings. ESG scores could also be higher with further disclosure on waste and water consumption.

Reiterate BUY on ST Engineering

• Amid rising interest rates, we lower our DCF-based target price for ST Engineering to S$4.20 from S$4.50, as we raise our risk-free rate and cost of debt numbers. However, we believe ST Engineering’s strong order book (+22% year-to-date) and FY23-24E EPS growth of 10-12%, may be key catalysts in this recessionary environment.

• ST Engineering's share price is trading at ~16.68x FY23E PER (below its 5-year mean) with 23% upside potential. Maintain BUY.

Source: Maybank Research - 12 Oct 2022