Introduction

In this comprehensive analysis by Maybank Research, we delve into the financial performance and strategic outlook of Singapore Technologies Engineering Ltd (ST Engineering). The report provides an in-depth examination of its various business segments, evaluates key performance drivers, and discusses the company’s future outlook.

ST Engineering: A Market Leader in Aerospace and Defense

ST Engineering has carved a niche for itself as a formidable player in both the commercial and defense sectors, with a revenue split of 55:45. The company has successfully transitioned from being merely Singapore’s primary defense contractor to a global player in commercial aerospace, urban solutions, and SATCOM.

The company reported strong growth in its Defense and Public Security (DPS) segment, which achieved a 31% year-on-year increase in the third quarter revenue, reaching SGD1.272 billion. This robust performance is attributed to gains across all sub-segments, including digital and land & marine.

While commercial aerospace showed an increase in engine Maintenance, Repair, and Overhaul (MRO), it faced challenges such as feedstock shortages affecting Passenger to Freighter (PTF) conversions. The Urban Solutions and SATCOM (USS) segment, on the other hand, experienced a decrease in revenue, highlighting the need for strategic pivoting.

Despite these challenges, Maybank Research has downgraded ST Engineering to a HOLD recommendation, citing a slowdown in order book growth and delays in USS business turnaround as key reasons.

Order Book and Market Dynamics

The order book for ST Engineering stood at SGD26.9 billion, down from SGD27.9 billion in the previous quarter, primarily due to foreign exchange impacts. The third quarter saw new order wins of SGD2.2 billion, distributed across its primary segments.

While the company continues to execute well, the slowdown in order book growth could potentially impact EBIT margins. The report emphasizes the critical need for a reversal in this trend to sustain earnings growth.

Financial Metrics and Valuation

ST Engineering’s financial outlook shows positive trends in revenue growth and EBITDA margins. From FY22 to FY26, the company is projected to experience significant growth in revenue, with an expected increase from SGD9,035 million in FY22 to SGD12,410 million by FY26. The EBITDA margin is projected to improve from 13.9% to 18.0% over the same period.

However, with a 14% year-to-date stock price increase, the dividend yield has compressed to 3.5%. The report underscores the importance of order book growth in sustaining EPS growth.

Sustainability and Risk Management

ST Engineering is committed to sustainable practices, achieving a 30% reduction in greenhouse gas emissions in FY22 compared to FY21. The company has set an ambitious target of a 50% reduction by FY30. Additionally, the group recycles a significant portion of its waste, demonstrating a strong commitment to environmental stewardship.

The report also highlights potential risks, including rising inflation, supply chain constraints, and competitive pressures from aircraft OEMs expanding into the aftermarket-MRO space.

Conclusion

ST Engineering remains a robust entity in the aerospace and defense sectors, with a well-diversified portfolio and strong market positioning. However, to maintain its growth trajectory, the company must address the challenges in its USS business and leverage strategic opportunities in its order book. The HOLD recommendation reflects the need for cautious optimism as ST Engineering navigates these market dynamics.