ST Engineering Ltd: Company Update and Investment Thesis
ST Engineering Ltd, a leading global technology, defence, and engineering group based in Singapore, continues to build momentum with impressive earnings growth and robust market performance. The group’s diversified portfolio spans aerospace, smart city, defence, and public security segments, offering integrated lifecycle solutions and innovative products that address real-world challenges. With emerging opportunities across various segments, ST Engineering stands well-positioned to ride on multi-year defence CAPEX cycles and benefit from its advanced aerospace maintenance, repair, and overhaul (MRO) offerings, as well as its growing passenger-to-freighter conversion business.
Key Performance and Investment Highlights
- Earnings Growth: The company achieved total returns of 21% in 2023 and an exceptional 24% in 2024, adding a further 13% year-to-date. It recorded a 20% increase in FY24 net profit, supported by a dividend raise.
- Robust Order Book: As at the end of FY24, the order book stood at SGD28.5 billion, with SGD8.6 billion expected to be delivered in 2025, reflecting strong market demand.
- Stability and Accumulation: With its established track record of performance relative to the Straits Times Index and the stability in its dividend policy, the stock is seen as a quality name for accumulation, especially on market dips.
- Segment Performance:
- Commercial Aerospace: Recorded revenue of SGD4.4 billion with a 12% increase compared to the previous year, with EBIT experiencing a 19% rise.
- Defence & Public Security: Generated revenue of SGD4.9 billion along with a strong EBIT performance growing by 16%.
- Urban Solutions & Satcom: Delivered improved revenues with SGD2.0 billion and saw EBIT improvements thanks to cost efficiencies and reduced divestment losses.
Financial Performance and Operating Metrics
ST Engineering’s financial performance has been on an upward trajectory. The group reported FY24 revenue of SGD11.3 billion, with net profit reaching SGD702.3 million – a figure that surpassed estimates by 3%. Revenues increased by 12% year-over-year, and net profit surged by 20%, affirming the company’s ability to drive growth through its strategic initiatives.
FY24 Financial Summary (in SGD millions):
- Revenue: 11,276
- EBIT: 1,077
- Net Profit: 702.3
- EPS: 0.23
- DPS: 17.0 cents (consistent across FY24 to FY26E)
- Operating Margin: 9.5% (rising gradually to 9.7% by FY26E)
- Net Profit Margin: 6.2% in FY24, expected to grow to 7.1% by FY26E
- Dividend Yield: 3.2% consistently
Valuation Analysis and Market Comparables
The valuation analysis presents an insightful comparison between ST Engineering Ltd and key industry peers, including SIA Engineering Company Ltd, Northrop Grumman Corp, and BAE Systems Plc. Several key ratios were analyzed:
- Price/Earnings (PE): ST Engineering’s PE ratios indicate a competitive valuation, with slight adjustments in forecasted earnings over the coming fiscal years.
- Price/Book: The price to book measures portray the group as appropriately valued relative to its balance sheet strength.
- EV/EBITDA: This ratio for ST Engineering compares favorably with its industry peers, underscoring operational efficiency and market confidence.
- Dividend Yield: With a stable dividend yield of 3.2%, the company is attractive for income-focused investors.
- Return on Equity (ROE): The ROE improvements signal effective capital management and shareholder return optimization.
A detailed benchmarking against competitors shows that while ST Engineering maintains a strong operational and financial profile, its peers also exhibit distinct investment merits. Notably:
- SIA Engineering Company Ltd: Demonstrates a solid margin profile with modest PE and price/book ratios, reflective of its specialized aerospace maintenance and engineering business.
- Northrop Grumman Corp (NOC): Benefits from robust defence contracts and strong earnings potential, with PE and EV/EBITDA metrics that are competitive in the large-cap defence space.
- BAE Systems Plc: Commands a strong market presence globally, with consistently competitive dividend yields and operational margins.
Company Overview and Segment Breakdown
ST Engineering is widely recognized for its global technology expertise across multiple high-growth sectors. Operating in more than 100 countries, the group leverages technology and innovative solutions to drive stability and growth across its diversified segments.
FY24 Revenue Breakdown by Segment:
- Defence & Public Security: 44.0%
- Commercial Aerospace: 38.7%
- Urban Solutions & Satcom: 17.0%
Geographical Revenue Allocation:
- Asia: 51.4%
- US: 23.0%
- Europe: 18.9%
- Others: 6.7%
Income Statement and Historical Financials
Reviewing historical income statements from FY2020 to FY2024, ST Engineering has demonstrated consistent revenue growth and operational efficiency:
- Revenue increased from SGD7.16 billion in FY2020 to over SGD11.27 billion in FY2024.
- Gross profit grew steadily, underpinned by efficient cost management despite rising cost of revenue.
- Operating income experienced healthy growth with improvements in EBIT margins each year.
- Net profit margin and effective tax management resulted in strong earnings per share, supported by consistent dividend payouts.
The company’s robust performance is further illustrated by its strong returns on common equity, assets, and invested capital. Efficient use of capital has also translated into a higher sustainable growth rate and enhanced credit ratios over the years.
ESG and Future Catalysts
ST Engineering has consistently maintained its ESG rating, scoring well above the industry average in areas such as Clean Tech and Labour Management. Although its GHG mitigation performance scores a mid-range rating of 7.0 out of 10, the company continues to set ambitious but realistic reduction targets.
Potential Catalysts for Future Growth:
- Recovery in the aerospace segment, which may drive stronger margins.
- Sustained growth in new contract wins, particularly driven by developments in the electronics sector.
- Better-than-expected margins on new projects and improvements arising from strategic contract execution.
Investment Risks and Considerations
Despite the strong performance metrics and promising outlook, there are specific risks that investors should consider:
- A potential decline in oil prices could exert pressure on the marine-related business segment.
- Margins on new contracts might be lower than expected in some cases.
- Integration challenges following acquisitions could impact short-term performance.
- An extended recovery period in the aerospace segment may delay anticipated benefits.
Analyst Recommendation
Based on comprehensive analysis and comparisons with its peers, OCBC Investment Research Private Limited maintains a BUY rating for ST Engineering Ltd. The firm’s findings point to total expected returns (excluding dividends) well in excess of 10%, positioning the company as an attractive long-term investment for growth and stability.
Conclusion
ST Engineering Ltd continues to set a high benchmark in the technology, aerospace, defence and urban solutions sectors. With a diversified revenue base, consistent financial performance, strategic exposure to global defence spending cycles, and a robust organic and inorganic growth strategy, the company remains a favored pick among investors looking to capitalize on a stable and dynamic market. In addition, the valuation analysis alongside detailed comparisons with key players in the aerospace and defence sectors – namely SIA Engineering Company Ltd, Northrop Grumman Corp, and BAE Systems Plc – reinforces the company’s competitive positioning in an evolving industry landscape.
This comprehensive review underscores the depth of ST Engineering’s operational efficiency, significant order book, and a well-balanced portfolio across geographies and segments, making it a standout investment opportunity in today’s financial markets.
