This, they note, was because tariff impact was “not as bad”.
Borrowings fell to $5.5 billion in the period, with the group expecting around $450 million of divestment proceeds by the 4QFY2025.
Revenue in the period rose 7% y-o-y to $5.9 billion, or 6% y-o-y to $2.9 billion in the 2QFY2025, driven by the group’s Commercial Aerospace segment’s (CA) revenue growth of 11% y-o-y to $1.2 billion.
Growth in the Defence and Public Security (DPS) business revenue came in at 6% y-o-y to $1.3 billion was in-line for the pair.
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With an interim dividend per share of four cents announced in the 2QFY2025, dividend per share in the first half came to a total of eight cents. With this, ST Engineering maintained its guidance of 18 cents for the FY2025.
Lim and Kande write: “Meanwhile, ST Engineering lowered its guidance for the impact of US tariffs on engines maintenance, repair and overhaul (MRO) China to $34 million over 2.5 months in 2QFY2025 and maintained plans to not absorb suppliers’ tariff costs unless it is able to pass through such costs.”
They note that the group’s target set during its Investor Day in March to achieve over $1 billion in cumulative cost savings during the FY2025 to FY2029 has “started to bear fruit” in the 1HFY2025, following the over $100 million recorded in savings via procurement and productivity gains.
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In the 1HFY2025, ST Engineering also recognised $46.9 million in one-off income from the absence of foreign exchange (forex) loss from corporate venture investments, compensation for a lease termination by a lessor and late payment interest.
The group, which is constantly reviewing its portfolio to streamline businesses made divestment gain of $180 million from the sale of stakes in US-based construction equipment unit LeeBoy and joint-venture SPtel. If completed, these will be booked in the 2HFY2025.
On this, Lim and Kande write: “We believe the market will reward ST Engineering for hiving off low-margin or loss-making businesses.”
The group is also widening its global defence presence and offerings, including growing MRO for military aircraft in the Middle East and North Africa.
“The demand and inquiries for 40 millimetre (mm) and 150 mm ammunition, as well as armoured vehicle platforms, has not waned, in our view,” write the CGSI analysts.
With this, Lim and Kande have raised their target price on the stock to $8.70 from $8.40 previously. They write: “We lift FY2025 to FY2027 core EPS by 2% to 5% on lower financing costs and higher CA margins.”
A key downside risk noted by them is slower order wins for ST Engineering.
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Analyst Jason Sum of DBS Group Research (DBS), meanwhile, notes that the group’s strength lies in offering integrated offerings that “set it apart” from more “narrowly-focused” competitors, this coming alongside its dominant positions in defence, MROs and as a rising provider of smart city platforms.
He maintains his “hold” call with an improved target price of $8.20 from $7.70 previously after rolling forward his price-to-earnings ratio (P/E) valuation peg, while maintaining a neutral stance as the group’s strong fundamentals are already priced in.
In the first half, ST Engineering’s order backlog climbed to a new record of $31.2 billion, with an average book-to-bill ratio of 1.4 times over the past 12 quarters.
Sum writes: “We expect the group’s core net earnings to grow at an impressive 15% to 20% compound annual growth rate (CAGR) between FY2024 to FY2026, driven by capacity expansion, faster project delivery across all business segments, strengthening operating margins and lower interest costs from deleveraging.”
With regards to the group’s DPS business, he notes that rising procurement budgets in Europe and the Middle East, especially for equipment, are expanding ST Engineering’s export runway, with earlier investments in research and development (R&D), partnerships and marketing now set to deliver returns.
“Meanwhile, Smart City demand is accelerating as governments prioritise mobility, sustainability, and public safety initiatives,” adds Sum.
He sees that these trends suggest the group’s earnings could exceed the guidance of low to mid-teen CAGR over FY2024 to FY2029, with the group’s merger and acquisition (M&A) strategy likely to provide further uplift.
He writes: “ While ST Engineering’s growth narrative remains compelling, we see limited upside from current levels given its already rich valuations, even compared to European and North Asian commercial aerospace and defence peers, and recommend accumulating on weakness.”
Citi Research’s (Citi) Luis Hilado has a similar view, keeping his “neutral” call on the stock at a higher target price of $8.75 from $8.40 previously.
He notes that the group’s momentum was “slightly ahead” of Citi’s prior forecasts given its stronger y-o-y orderbook point to a stronger 2HFY2025. This was due to not only the DPS business, but the q-o-q pick up in the CA segment and significant order wins for Urban Solutions and Satcom (USS).
“Both DPS and CA earnings before interest and taxes (ebit) margins were better than our prior FY2025 expectations and management indicated this was not only due to project mix but also $100 million in procurement and operating expense (opex) savings,” adds Hilado.
With this, he has raised his margin outlook for both business segments, which he notes accounts for 98% of ST Engineering’s ebit.
Key downside risks noted by Hilado that could cause the group’s shares to trade below his target price include a slowdown in aerospace MRO and passenger-to-freight (PTF) conversion demand and significant acquisitions that would dampen initial overall returns.
Conversely, upside risks include better than expected revenue or margin delivery due to faster order book turnaround and faster momentum for the group’s urban solution deployment projects in the US and Asia.
Lorraine Tan of Morningstar Equity Research (Morningstar) and Shekhar Jaisawal of RHB Bank Singapore (RHB) are more bullish among their peers.
Tan notes that ST Engineering’s results show ”impressive margin movement”, with interim top-line performance “on the higher end” of her expectations and margin improvement coming in better than she had anticipated.
She writes: “We had underestimated ST Engineering's ability to lower costs this quickly. While its commercial aerospace activities in Florida are still facing labor constraints, the group has been able to reduce some pressure by consolidating its US MRO activities to Pensacola from Mobile, Alabama.”
Tan adds: “We consider revenue growth of 5.2% y-o-y at the CA segment to be in line with our expectations for full-year growth of 10.7% , as we expect a stronger second half with the opening of its new plant in China.”
Overall, while Tan thinks revenue could “run ahead” of the flat $1.92 billion that she forecasts, her estimates have been left unchanged.
The Morningstar analyst has a two-star rating on the stock, which according to the brokerage’s rating system, indicates that “investors are likely to receive a less than fair risk-adjusted return.”
She has also raised her fair value estimate by 21% to $8.10, driven mainly by the group’s improved profitability. Tan writes: “The profit growth would help ST Engineering increase its dividends, which would augur well with investors.”
Lastly, RHB’s Jaiswal is maintaining his “buy” call on the stock at a raised target of $9.10 from $8.70, raising his FY2026F to FY2027 earnings by between 3% to 4% on sustained CA and DPS margins beyond FY2025.
Although the group’s 1HFY2025 met his expectations, he adds that USS revenue fell short of estimates. On this, he writes: “ST Engineering expects USS topline to be weighted towards 2HFY2025 and anticipates CA revenue growth to outpace the industry.”
On the group’s CA securitisation sub-segment Jaiswal writes: “The fund transition could accelerate asset under management to US$3.5 billion ($4.49 billion) by FY2029 and boost synergies with MRO and P2F conversions.”
Shares in ST Engineering closed six cents higher or 0.71% up at $8.46 on Aug 15.
