Executive Summary
This comprehensive report provides a detailed look into ST Engineering, a leading conglomerate in Singapore that is transforming its business through strategic focus on its high‐growth segments: Commercial Aerospace, Urban Solutions & Satcom, and Defence & Public Security. The report outlines its robust growth drivers including raised dividend policies, margin improvements, robust order book strength, and significant media exposure from global defence opportunities. CGS International reiterates an “Add” recommendation with a raised target price of S\$5.60, anticipating robust EPS growth as the company continues to execute on its multi-pronged strategy.
ST Engineering Overview
ST Engineering has demonstrated remarkable resilience across its diversified business segments. With consistent performance improvements in core net profit and strong cash flow metrics, the conglomerate has reinforced its leadership in commercial aerospace and defence technology. The company has recently raised its full-year dividend per share (DPS) to 17 Scts and recorded notable margin expansion in Aerospace, despite some headwinds in Satcom. An enhanced record-high order book and international defence tailwinds provide a solid base for future growth.
Segment Analysis
Commercial Aerospace (CA)
The Commercial Aerospace segment continues to be a standout engine for ST Engineering. Key highlights include:
- Revenue and Margin Expansion: In 2H24, CA recorded revenue of S\$2.15bn with EBIT margins growing approximately 200bp year-on-year, driven by a favorable mix and productivity gains.
- MRO Growth: Maintenance, repair, and overhaul (MRO) revenues have risen particularly due to increased aircraft utilisation and robust engine MRO activity. Elevated demand from older aircraft MRO requirements and rising nacelle volumes support these trends.
- Passenger-to-Freighter Conversions: The company exceeded its target with FY24 PTF revenue reaching S\$706m, paving the way for strong medium-term revenue growth that is expected to outpace industry averages.
- Future Outlook: Management forecasts healthy CA EBIT growth with a forecasted CAGR of 7% from FY24 to FY27, supported by cost optimisation and margin expansion avenues.
Urban Solutions & Satcom (USS)
The Urban Solutions and Satcom division is undergoing a turnaround, driven by restructuring efforts and cross-selling initiatives:
- Rebound in EBIT: A significant half-on-half rebound in EBIT was recorded, although actual margins came in slightly lower than optimistic estimates.
- Satcom Recovery Initiatives: The restructuring efforts in Satcom have begun to bear fruit with 4Q24 revenue up 12% year-on-year and EBIT turning marginally positive. Revenue growth is expected to resume at around +5% in FY25.
- Cross-Sell Spotlight: The recent win of a tolling solutions contract in Southeast Asia under the TransCore cross-selling program signifies the unlocking of additional revenue streams.
Defence & Public Security (DPS)
Defence and Public Security remains a robust segment for ST Engineering. Highlights include:
- Steady Revenue Growth: DPS achieved 2H24 revenue of S\$2.56bn with a year-on-year increase of 20%, underpinned by strong performances in digital systems and land systems.
- Margin Stability: Despite minor fluctuations, 2H24 EBIT margins remained steady with the annual full-year EBIT margin recorded at 12.9%, reflecting competitive execution even amid fluctuations in the global defence landscape.
- Global Demand: Ongoing conflicts and heightened geopolitical tensions have driven demand for defence solutions, and the company continues to pursue numerous international opportunities, with further updates expected during its upcoming Investor Day.
Financial and Valuation Metrics
ST Engineering has maintained strong financial health, with several key points of note:
- Core EPS Growth: Core EPS is forecasted to grow at a 10% CAGR from FY24 to FY27, supported by a record-high order book and lower interest costs.
- Valuation: The current valuation is based on a 20x P/E multiple, consistent with the 10-year historical average, with a target price rise from S\$5.30 to S\$5.60.
- Cash Flow Generation: Strong operating cash flows and improved free cash flow to firm and equity metrics underscore the company’s financial robustness.
- Balance Sheet Strength: With a solid equity base and controlled debt metrics, ST Engineering continues to enhance its return on capital (ROIC and ROCE) with incremental improvements expected over the next few years.
Order Book and Future Growth Catalysts
The outlook for ST Engineering remains buoyed by a record-high order book that reached S\$28.5bn at the end of 4Q24. Key catalysts for re-rating include:
- Sizeable Order Wins: Continuous large-scale contracts in Commercial Aerospace and Defence are expected to reinforce earnings strength.
- Investor Day Deliberations: Upcoming sessions in March 2025 will provide detailed segment targets and insights into capital management strategies.
- Global Defence Tailwinds: The company’s exposure to international defence projects remains a critical driver of future revenue and profit growth.
ESG and Strategic Transformation
ST Engineering has successfully repositioned its ESG profile from past associations with controversial munitions to a focus on sustainability and responsible business practices:
- Environmental Excellence: Achieving an “A” grade in the Environment pillar, the company has made significant strides in reducing greenhouse gas (GHG) emissions, having achieved a 36% reduction in 2023.
- Social Responsibility: Improved disclosure on human rights and ethical practices underpins its A‑ rating in the Social category.
- Governance Improvements: While the Governance score of B‑ highlights areas for further development, overall, ST Engineering is valued at a premium by investors due to its sustained performance and strategic realignment.
Peer Comparison Analysis
A detailed peer comparison underscores ST Engineering’s competitive positioning across three major sectors. The report provides a comprehensive look at multiple companies in each group:
Commercial Aerospace Peers
The report features an analysis of key aerospace players including:
- AAR Corp, FTAI Aviation Ltd, General Electric Co, HEICO Corp, RTX Corp, Safran SA, SIA Engineering, Spirit AeroSystems Holdings, and Triumph Group Inc: These companies are benchmarked on metrics such as FD Core P/E, dividend yield, gross interest cover, and P/BV ratios. The median values and detailed financial parameters provided help investors gauge competitive positioning and valuation attractiveness relative to ST Engineering’s growth prospects.
Urban Solutions Peers
Within the urban solutions space, a range of global heavyweights are evaluated:
- ABB Ltd, Cisco Systems Inc, Fujitsu Ltd, General Electric Co, Hitachi Ltd, Honeywell International Inc, IBM, Intel Corp, Motorola Solutions Inc, NEC Corp, Schneider Electric SE, and Siemens AG: These companies are compared on operational returns, balance sheet metrics, valuation multiples, and dividend yields. The detailed peer metrics showcase the stringent operational performance criteria necessary to excel in the urban solutions and smart city arena.
Satellite Communications and Defence Peers
For satellite communications, the analysis includes:
- Intel Corp, Motorola Solutions Inc, NEC Corp, Schneider Electric SE, and Siemens AG: Despite facing a challenging business environment, these companies’ key ratios, such as dividend yield and valuation, are scrutinized.
In the defence and public security category, major players such as:
- BAE Systems PLC, Elbit Systems Ltd, General Dynamics Corp, Hanwha Aerospace Co Ltd, Hyundai Rotem Co Ltd, LIG Nex1 Co Ltd, Lockheed Martin Corp, Mitsubishi Heavy Industries Ltd, Northrop Grumman Corp, Oshkosh Corp and Rheinmetall AG are analyzed. The report dissects their operational performance, margin stability, and growth trajectories, providing a clear picture of the competitive landscape for defence contracting and high-technology solutions.
Marine Peers
Further, in the marine and shipbuilding sector, the report covers:
- China CSSC Holdings Ltd, China Shipbuilding Industry Co, Hanwha Ocean, HD Hyundai Mipo, Korea Shipbuilding & Offshore, Samsung Heavy Industries, and Yangzijiang Shipbuilding: With detailed coverage on revenue performance, operating margins, inventory days and payables management, this analysis highlights the cyclical and capital-intensive nature of the marine sector.
Rolling Metrics and Valuation Trends
The report also examines rolling forward key valuation multiples, including the FD Core P/E and P/BV ratios. Historical trends and current benchmarks are provided, with the median sector values offering investors a yardstick against which to measure ST Engineering’s current market positioning. Through robust order book strength, the company is expected to continue outperforming its peers in select segments.
Market Recommendations and Price Targets
CGS International reiterates an “Add” rating for ST Engineering. The analysis reflects that the company’s multi-sector strengths, strategic transformation, strong operational performance, and consistent dividend increases support a target price of S\$5.60. The future outlook is built on several key catalysts:
- Record-high order book levels expected to deliver c. S\$8.8bn in FY25.
- International defence demand as well as growth opportunities in Commercial Aerospace through increasing MRO activities and PTF conversions.
- A turnaround in the Satcom area bolstered by restructuring and cross-selling initiatives.
Final Thoughts
Overall, the report conveys a robust and optimistic view on ST Engineering’s ability to translate its strategic initiatives into consistent EPS growth. With its diversified business model, competitive peer positioning, and steady improvements in governance and ESG performance, it remains a compelling investment proposition in a challenging global landscape. Investors are advised to watch forthcoming details provided at the upcoming Investor Day in March 2025 for further insight into segment targets and capital management strategies.
About CGS International Securities
CGS International Securities, operating as part of the larger CGS International group, prepares and publishes detailed research reports covering companies from various sectors. Their analysis is rooted in exhaustive data, covering operational metrics, valuation trends, and forward-looking expectations to help investors make informed decisions.
