CGS International
May 10, 2025
ST Engineering: Defence Sector Drives Growth with Bullish Outlook
ST Engineering (STE) demonstrates strong growth potential, particularly within its Defence & Public Security (DPS) segment. Despite concerns over tariffs, the company’s fundamentals remain solid, supported by a substantial order book of S\$29.8 billion. This analysis highlights STE’s robust financial performance, strategic partnerships, and future growth catalysts, leading to an increased target price.
Key Highlights
- Growth Fundamentals: STE’s growth remains intact despite tariff concerns, which have limited direct impact on earnings and order wins.
- Dividend Upswing: With five consecutive quarters of double-digit revenue growth, dividend per share (DPS) growth assumptions for FY25-27F are increased to 8-12% (previously 7-11%).
- Earnings Forecast: FY25-27F earnings per share (EPS) are up by 1-2% due to higher DPS revenue and lower net interest expense.
- Target Price: The target price (TP) is increased to S\$8.40, pegged to +2.5 standard deviations of the mean.
Defence & Public Security (DPS) as a Growth Driver
DPS continues to be a primary growth engine for ST Engineering. In 1Q25, DPS revenue reached S\$1.3 billion, marking an 18% year-over-year increase driven by project milestones. The segment secured S\$2.7 billion in orders during the quarter, representing 61% of the group’s total order wins of S\$4.4 billion. Notable contracts include those from the Singapore Ministry of Defence for Unmanned Surface Vessels (USVs), with deliveries commencing from 2027 onwards. International defence opportunities, especially in Europe and the Middle East, remain promising, supported by strategic partnerships to meet local content needs [[1]].
Commercial Aerospace (CA) Revenue Deferral in China
The Commercial Aerospace (CA) sector reported flat year-over-year revenue at S\$1.1 billion in 1Q25. While STE’s assessment indicates immaterial financial implications from tariffs, revenue deferrals of less than S\$40 million per month may occur in China as customers await clarity on tariffs and spare parts procurement. This situation has led to dynamic inventory consumption as customers utilize their own spare inventories for Maintenance, Repair, and Overhaul (MRO) work. Feedstock shortages for passenger-to-freighter conversions persist but have not worsened year-over-year [[1]].
Urban Solutions & Satcom (USS) Expansion in Smart Mobility
The Urban Solutions & Satcom (USS) segment saw a 4% year-over-year revenue increase, reaching S\$446 million, driven by smart mobility (including road tolling) and infrastructure projects. The Transcore order book has doubled to S\$3 billion since its acquisition. A stronger second half of FY25 is expected for USS due to customer launches and order wins. Delays in new order wins in SATCOM have been noted as customers reassess spending priorities. The US\$1.7 billion Turnpike contract (not in the order book) could proceed if an appeal by the incumbent at the Supreme Court is ruled in STE’s favor [[2]].
Financial Impact from US\$/SG\$ Movements
- A 1% movement in US\$/SG\$ impacts revenue by S\$35 million.
- Translation impact of S\$2.5 million.
- Transaction impact leads to S\$2 million profit per annum.
Investment Recommendation
ST Engineering is rated as an “Add,” supported by growth prospects and a structural shift in the defence operating environment. The target price is raised to S\$8.40, based on a 28x CY26 P/E ratio (previously 25x). Key catalysts include sustained double-digit EPS growth in FY25-27F and significant defence contract wins. A sharp global economic slowdown is noted as a downside risk [[2]].
Analyst Information
- Analyst: LIM Siew Khee
- Contact: T (65) 6210 8664, E siewkhee.lim@cgsi.com
Key Financials
| Financial Summary (S\$m) |
Dec-23A |
Dec-24A |
Dec-25F |
Dec-26F |
Dec-27F |
| Revenue |
10,101 |
11,276 |
12,289 |
13,208 |
14,066 |
| Operating EBITDA |
1,382 |
1,543 |
1,702 |
1,843 |
1,974 |
| Net Profit |
586 |
702 |
825 |
936 |
1,027 |
| Core EPS (S\$) |
0.18 |
0.23 |
0.26 |
0.30 |
0.33 |
| Core EPS Growth |
34.8% |
22.3% |
17.5% |
13.4% |
9.8% |
| FD Core P/E (x) |
41.40 |
33.86 |
28.83 |
25.42 |
23.15 |
| DPS (S\$) |
0.16 |
0.17 |
0.18 |
0.19 |
0.20 |
| Dividend Yield |
2.10% |
2.23% |
2.36% |
2.49% |
2.62% |
| EV/EBITDA (x) |
21.18 |
18.68 |
16.88 |
15.40 |
14.23 |
| P/FCFE (x) |
34.93 |
25.89 |
33.87 |
25.27 |
22.86 |
| Net Gearing |
209% |
183% |
162% |
136% |
114% |
| P/BV (x) |
9.67 |
8.91 |
8.11 |
7.26 |
6.47 |
| ROE |
23.6% |
27.4% |
29.4% |
30.1% |
29.5% |
Strategic Partnerships in Defence
ST Engineering is actively pursuing international defence opportunities through strategic partnerships [[2]].
- Finland: Actively promoting the Bronco 3 all-terrain vehicle (ATV) in Europe. A partnership with SISU has led to the development of the SISU GTT ATV, integrating STE’s Bronco ATV design with SISU GTP technologies.
- Italy: Partnered with Leonardo and ARIS to supply the Italian Army with the Bronco 3.
DPS Revenue Target
The target set during investor day for DPS revenue of over S\$7.5 billion by 2029F could be achieved earlier due to a structural shift in global security and increased defence spending [[2]].
Revenue by Segment (S\$’m)
|
1Q23 |
2Q23 |
3Q23 |
4Q23 |
1Q24 |
2Q24 |
3Q24 |
4Q24 |
1Q25 |
| Commercial Aerospace |
873 |
983 |
982 |
1,067 |
1,152 |
1,079 |
1,054 |
1,099 |
1,153 |
| Urban Solutions & Satcom |
434 |
457 |
478 |
575 |
429 |
489 |
455 |
584 |
446 |
| Defence & Public Security |
982 |
1,135 |
973 |
1,162 |
1,123 |
1,249 |
1,272 |
1,291 |
1,322 |
| Total Revenue |
2,289 |
2,574 |
2,434 |
2,804 |
2,703 |
2,817 |
2,782 |
2,974 |
2,921 |
Smart Mobility Contract Wins
ST Engineering has secured significant smart mobility contracts from 2021 to April 2025, enhancing its position in railway and tolling solutions [[3]].
Railway Solutions Contracts
- Kaohsiung MRT Red Line North Extension: Systems integration and project management (S\$290m).
- Kaohsiung MRT Yellow Line: Turnkey rail services (S\$1,400m).
- Kaohsiung MRT Red Line South Extension: Systems integration and project management (S\$430m).
- Queensland Government: AGIL® Passenger Information System (PIS) for 65 trains.
- Bangkok MRT Orange Line: SCADA system and AGIL® PSD solutions (S\$180m).
- Taichung MRT Blue Line: Turnkey rail services (S\$1,400m).
- Total (outside of Singapore): S\$3,700m.
Tolling Solution Contracts
- New Jersey state-wide All-Electronic Tolling (AET) Systems: Turnkey systems (S\$1,250m).
- South Jersey state-wide All-Electronic Tolling (AET) Systems: Turnkey systems (S\$218m).
- Other AET System Projects: S\$32m
- Total: S\$1,500m.
Order Book and Earnings Revision
ST Engineering’s order book continues to hit record highs, reaching S\$29.8 billion as of the end of 1Q25, with approximately S\$8.8 billion expected to be delivered in FY25F [[4]]. Earnings revisions reflect increased revenue expectations across segments, particularly in Defence [[4]].
Tariff Impact Assessment
ST Engineering has assessed the tariff impact and sees immaterial financial implications, though some revenue deferrals may occur in China [[5]].
Peer Comparison
A comparison against industry peers highlights ST Engineering’s competitive positioning across various sectors, including Commercial Aerospace, Urban Solutions, Satellite Communications, and Defence & Public Security. Key metrics include Bloomberg recommendations, price targets, market capitalization, EPS growth, ROE, and dividend yield [[6]].
ESG Performance
ST Engineering’s ESG combined score by LSEG improved from a B- since 2015 to B+ in 2023. The 2023 LSEG ESG combined score of B+ is split into Environment: A (weightage 23.7%); Social: A+ (weightage 43.9%); and Governance: A+ (weightage 32.4%).
- Ranked 11 within 108 global peers in the Aerospace & Defence industry.
- Environmental pillar achieved a 5-year average score of 100.00, due to strong control in greenhouse gas (GHG) emissions.
- Achieved a reduction of 36% GHG emissions.
- Human rights performance rose 24.3% yoy in 2023, due to the disclosure of its human rights policy.
- Community performance rose 18.86% yoy in 2023.
Financial Charts
P/BV vs ROE
