Deep Dive Analysis of ST Engineering

Broker: Maybank Research Pte Ltd

Date: February 28, 2025

Overview of ST Engineering

ST Engineering (STE) is a prominent engineering conglomerate in Singapore, recognized for its diverse business interests in commercial aerospace, urban solutions and satellite communications (SATCOM), and defense and public security. The company has successfully transitioned from being primarily a defense contractor to tapping into the commercial market, currently achieving a revenue split of approximately 55% from commercial operations and 45% from defense-related activities.

Financial Performance Highlights

In FY24, STE reported a remarkable performance with a profit after tax and minority interest (PATMI) of SGD702.3 million, reflecting a robust growth of 19.7% year-on-year (YoY). The revenue for the fiscal year reached SGD11.3 billion, a growth of 12% YoY, driven primarily by substantial contributions from the aerospace and defense sectors, alongside improved EBIT margins. The final quarterly dividend was set at SGD0.05, marking an increase of SGD0.01 from the previous year.

Revenue Breakdown

STE’s commercial aerospace sector saw a revenue increase of 12% YoY, bolstered by sales in engine maintenance, repair, and overhaul (MRO), nacelles, composite panels, and passenger-to-freighter (PTF) conversions. Notably, the PTF segment generated SGD706 million in revenue, exceeding the 2021 investor day target of SGD700 million expected for 2026.

The defense and public security (DPS) segment also performed strongly, with a revenue increase of 16% YoY across all sub-segments. Additionally, the digital business exceeded expectations, achieving SGD645 million in revenue—well above the 2021 investor day target of SGD500 million for 2026. However, the urban solutions and SATCOM (USS) revenue remained flat. Encouragingly, the satellite communications business demonstrated early signs of recovery, recording a 12% YoY revenue growth in Q4 despite a weaker full-year performance compared to the previous year.

Operational Efficiency and Order Book Growth

STE achieved considerable improvements in operational efficiency, with operating expenses as a percentage of revenue dropping to 10.6%, the lowest since FY2019. This was attributed to ongoing productivity gains and cost management strategies aimed at mitigating inflation impacts. All segments, except DPS, reported higher EBIT margins, with the USS segment showing signs of recovery.

The company’s order book expanded by 4% YoY to SGD28.5 billion, driven by strong contract wins amounting to SGD4.3 billion in the last quarter. The guidance for order delivery for FY25 is projected at SGD8.8 billion, an increase from SGD7.9 billion in FY24, suggesting low-teens top-line growth moving forward.

Analyst Recommendations

Given the positive trajectory of STE’s financials, the author has upgraded the stock to a BUY rating. Profit estimates were raised by 8-10%, reflecting higher revenue expectations and improved margins. The dividend estimate has also been increased to SGD0.18 from the previous SGD0.16. The target price has been adjusted to SGD5.70, projecting continued growth, enhanced margins, and a potential turnaround in the SATCOM business.

Valuation Insights

The valuation of STE employs a discounted cash flow (DCF) model with a weighted average cost of capital (WACC) of 8.4%. The revision of profit estimates and enhancements in cash management practices have led to an increased target price of SGD5.70. The anticipated growth, steady execution, and improved dividend yield further bolster the investment appeal.

Risks to Consider

Despite the optimistic outlook, several risks could moderate STE’s growth and margins in the commercial aerospace sector. These include the potential for slower-than-anticipated turnaround in urban solutions and SATCOM, ongoing wage inflation, and the threat posed by aircraft OEMs like Boeing and Airbus expanding aggressively into the MRO space. Additionally, disruptions in airborne cargo growth due to geopolitical tensions, such as the US-China trade war, could adversely affect demand for PTF conversions.

Conclusion

ST Engineering stands at a pivotal moment, with strong financial performance indicators, a growing order book, and an upgraded market position. The company’s strategic focus on improving operational efficiency and expanding into commercial markets places it in a favorable position for future growth. Investors are encouraged to consider STE as a compelling opportunity in the industrials sector.