Date: October 2, 2024
Broker: CGS International Securities
Company Overview
ST Engineering (STE) is a conglomerate based in Singapore, with operations spanning aerospace, defence, public security, and smart city solutions. As of October 2024, the company has a market capitalization of approximately S$14.5 billion (US$11.24 billion) and trades on the Singapore Exchange under the ticker STEG.SI. It is backed by key institutional investors such as Temasek Holdings (50%), Capital Group (5%), and BlackRock (1.8%). STE has a 49% free float.
Defence Order Momentum
STE’s defence segment is set to benefit from global geopolitical uncertainties, which have heightened the demand for military ammunition and systems. Europe’s need for a stable ammunition stockpile, driven by the European Union’s Defence Industrial Strategy, is expected to contribute to increased order wins for STE. The company has also been involved in collaborations, including one with Babcock International to develop advanced mortar systems for the British Army. Defence order margins are projected to remain elevated at approximately 13% for FY24-26, supported by rising sales of high-margin products such as ammunition and ongoing cost-saving initiatives.
Aerospace and MRO Growth
The maintenance, repair, and overhaul (MRO) segment remains a significant growth driver for STE. Supported by positive industry commentary from peers such as AAR Corp, STE is well-positioned to benefit from the robust demand for MRO services, particularly as the slow pace of new aircraft deliveries continues. STE’s MRO growth is further expected to accelerate with the opening of new hangar facilities in the US and Singapore, alleviating existing capacity bottlenecks.
Multi-Year Earnings Growth
STE is forecasted to experience multi-year core EPS growth, driven by strong performances across its defence and aerospace segments. The company has revised its FY24-26 core EPS growth upwards by 3-5%, attributing the improvement to stronger defence margins and lower interest expenses due to anticipated US Fed rate cuts. In this environment, STE is considered a rate-cut beneficiary.
Financial Outlook
STE has seen robust growth, with revenue projected to grow from S$10.1 billion in FY23 to S$11.2 billion in FY24, further increasing to S$12.6 billion by FY26. The company’s core EPS is expected to grow at an average of 22.4% in FY24, 14.5% in FY25, and 8.5% in FY26. With a strong order book of S$27.9 billion as of June 2024, STE’s financial position is considered robust.
STE also offers an attractive dividend yield of 3.45%, with steady payouts forecasted over FY24-26. The balance sheet reflects an improving net gearing position, dropping from 224% in FY22 to an estimated 128% by FY26.
Target Price and Valuation
The target price for STE has been raised to S$5.30 (from S$5.00), based on a 20x CY25F P/E, which aligns with the company’s 10-year historical average. The company’s price performance has been solid, with the stock appreciating by 20% year-to-date as of October 2024. Potential catalysts for further price gains include large defence contract wins and successful expansion into Southeast Asia through its TransCore business.
Key Risks
While STE’s outlook is optimistic, the company faces potential risks from a global economic slowdown, which could negatively impact order wins and aerospace activities. Additionally, persistent labour and supply chain issues could exert downward pressure on the Aerospace segment’s margins.
ESG Standing
ST Engineering has demonstrated strong ESG credentials, with a combined ESG score of B+ as of 2023. The company has made significant strides in environmental sustainability, reducing its greenhouse gas (GHG) emissions intensity by 36% from a 2010 baseline, and is on track to meet its 50% reduction target by 2030. STE’s governance is rated B-, while its social pillar achieved an A- due to improved human rights policies and zero tolerance for unethical labor practices.
