The recovery of the commercial aviation industry has been a key driver of ST Engineering's post-Covid-19 growth. As a leading provider of maintenance, repair and overhaul services for commercial jets, the company capitalised on the sector's strong rebound, with its share price returning to pre-pandemic levels by last July.
The defence sector has further bolstered the boost from the commercial aerospace segment. Ongoing geopolitical tensions since Russia's invasion of Ukraine three years ago have led to increasing investor focus on defence. Analysts now predict that sales of military equipment, weapons and ammunition will drive sustained earnings growth for the company.
ST Engineering shares reached a new record of $6.03 on March 4, a day after various European defence stocks, such as Rheinmetall and BAE Systems, jumped more than 10% each. ST Engineering shares closed at $6.03 on March 4, extending a gain of more than 19% from before it reported its FY2024 earnings on Feb 27.
Governments across Europe are coming to terms with the fact that their decades-long reliance on US military backing can no longer be taken for granted. "The Donald Trump administration's refusal to provide clear security guarantees has made it clear that Europe must shoulder more of the burden itself. This will translate into significant, sustained increases in defence budgets," says Nigel Green, CEO of deVere Group.
For Green, this trend is not confined to Europe. "From Asia to the Middle East, the pattern is clear — countries are prioritising security and resilience, and the defence sector is the primary beneficiary," he says. "Investors can't afford to miss this new megatrend."
He is not alone in this view. "We increased our long-term growth assumptions in the new year of post-Pax American defence budgets. Nations have to rely more on their defence spending needs than larger nations," says PhillipCapital’s Paul Chew, who has raised his target price for ST Engineering from $5 to $6.20.
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"ST Engineering's international defence business should see strong tailwinds amidst elevated geopolitical uncertainty in Europe," says Sheika Jaiswal of RHB Bank Singapore, who has raised his target price from $5.20 to $5.90.
Local spending by ST Engineering's key customer, the Singapore government, is never publicly disclosed, but investors can reasonably infer that this segment will remain a reliable source of revenue. For the coming FY2025 ended April 2026, the Ministry of Defence expects to spend $23.4 billion, an increase of 12.4% over the preceding year.
Speaking in Parliament on March 3, just days after ST Engineering reported its FY2024 numbers on Feb 27, Defence Minister Ng Eng Hen says that the uncertainty of today's world calls for nations to secure more certainty for themselves. "Seasoned columnists who have witnessed historically churning events liken our time to that before the First World War and ask if we are 'sleepwalking' into our future," adds the Minister.
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"Before 1965, Singapore was not in charge of its own fate, so we could have blamed other countries — the British or other large powers. But as an independent and sovereign nation, we Singaporeans have agency and can decide and do all we can to secure our future together."
In FY2024, ST Engineering's defence and public security (DPS) segment reported a 16% y-o-y jump in revenue to $4.9 billion. The firm’s ebit in the same period was up 15% y-o-y to $636 million. In 4QFY2024, this segment won contracts worth $1.7 billion, bringing the FY2024 total to $5.3 billion.
Notable defence contracts won in FY2024 included the supply of 155mm artillery shells and 40mm grenades worth more than $100 million to Europe. ST Engineering has also formed a partnership with Kazakhstan Paramount Engineering to set up production capability in the former Soviet republic for a new 8x8 amphibious multi-purpose armoured vehicle. Other key deals won in the year included a shipbuilding contract for a walk-to-work vessel and repair and maintenance jobs for commercial and naval ships.
ST Engineering's digital capabilities used in cyber and public security are also organised under the DPS segment. In FY2024, this sub-segment enjoyed y-o-y revenue growth of 39% to reach $645 million, eclipsing the 2026 target set back in 2021 of $500 million. Notable deals will include those to deliver high-performance cloud infrastructure for AI processing, AI-enabled command and control systems, and training and simulation solutions. "Overall, I would say that we've done better than the year before, and there are a lot more prospects which we are pursuing," says Ravinder Singh, a former army general leading this segment at ST Engineering in his second career.
Gaining altitude
In FY2024, ST Engineering secured $12.6 billion in new contracts, bringing its total order book to $28.5 billion, $8.8 billion of which is expected to be delivered in 2025, 0.9% higher than the year before. "We have a robust order book and a competitive market position which will underpin our continuing revenue growth and performance," says CEO Vincent Chong. "It is more important, even as we see quarter-to-quarter and year-to-year fluctuations, to look at the longer-term trend and our track record of successfully competing for new contracts due to our competitive advantage, value proposition and our project execution," he adds.
Overall, ST Engineering reported earnings of $366 million for its 2HFY2024 ended Dec 31 2024, up 20% y-o-y. Revenue in the same period was up 10% to $5.76 billion. This brings its full-year earnings to $702 million, up 20% y-o-y and revenue to $11.3 billion, up 12%.
"We delivered a strong set of results in 2024 with three segments, each playing a key role in delivering growth and profitability with a healthy project mix, along with cost efficiencies and procurement savings that help improve our margins," says Chong at the results briefing on Feb 27.
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In line with the improved earnings, ST Engineering plans to pay five cents per share for the final quarter of FY2024, bringing its full-year payout to 17 cents. In the preceding two years, the company paid 16 cents each, an increase from the 15 cents paid per year between FY2017 and FY2021.
However, investors need to appreciate the balance the company is trying to achieve between higher payouts and preserving capital to invest for future growth, says Chong.
Besides DPS, the company's other key business segment is commercial aerospace. Thanks to a bigger volume of engine maintenance, repair and overhaul (MRO) services and other works and services, FY2024 revenue reported by the commercial aerospace segment was up 12% y-o-y to $4.4 billion, and ebit was up 19% to $400 million.
ST Engineering has maintained a steady pace of new contract wins in this segment. For example, it recently secured multi-year MRO deals for its CFM56-7 B and LEAP-1A engines with Korean Air and two other Middle Eastern operators.
Jeffery Lam, ST Engineering's president of commercial aerospace, reaffirmed the company's commitment to efficiently expanding its ability to take on more contracts. "In the next three years, we will have additional hangar capacity coming online. At the same time, we continue to look at network optimisation to ensure that we have capacity in the right places, supporting the right customers," he adds.
On March 6, the company announced that it will over the next few months shift its existing capacity in the US state of Alabama to its two other facilities in Florida and Texas.
ST Engineering has a significant business in so-called passenger-to-freighter (PTF) conversions, partnering with Airbus and Elbe Flugzeugwerke to provide conversion services since 1996. These conversion projects, primarily of Airbus's A330, A321 and A320 aircraft, are an integral part of its commercial aerospace sector business and have done very well. "With a revenue of $706 million in total for PTF business, (we) surpassed our revenue target of $700 million for PTF set for 2026, so we already achieved our 2026 target ahead of time, two years ahead of time," says Chong.
Cross-selling
ST Engineering's third business segment is urban solutions and satellite communications. In FY2024, USS revenue was largely the same at $1.96 billion. Its ebit, meanwhile, increased from $10 million to $40 million in line with expectations, attributed to lower Satcom severance costs and the absence of divestment loss. The satcom sub-segment reported 4QFY2024 revenue that was up 12% y-o-y and a marginally positive operating ebit. However, full-year revenue for its Satcom sub-segment remained weaker than it was in the preceding FY2023.
Other USS sub-segments made more meaningful gains. In FY2024, ST Engineering won a contract to develop a smart city platform in Lusail, Qatar. Its US-based subsidiary, TransCore, also won its first contract in Southeast Asia to provide a road toll system. For ST Engineering, this is a sign that its cross-selling efforts jointly undertaken by different business units are starting to bear fruit.
TransCore also manages the congestion pricing programme in New York City. While US President Trump's reversal of federal approval for the programme could dampen sentiment, ST Engineering is confident that there will be minimal impact. "We are basically the contractors that build the solution and do the maintenance, so there are no impairment effects on us at all," says Chong.
Tan Lee Chew, president of Smart City and Digital Solutions, notes that the contract in New York City is worth less than 2% of USS segment revenue and is "immaterial" to ST Engineering's total revenue.
Despite the strong gain in ST Engineering's share price following the results, there is still some way to go before reaching the revised target prices of many analysts.
ST Engineering "remains well-positioned to ride on the aerospace and defence capex upcycle, and there are positive structural trends as well for the USS segment over the longer term," says OCBC Investment Research, whose target price adjustment from $4.83 to $6.30 was the largest among the analysts.
Jason Sum of DBS Group Research observes that ST Engineering's share price has outperformed year-to-date. However, given its sound fundamentals, valuations remain undemanding. "We see continued execution on its growth story catalysing a re-rating in the near term," says Sum, who has raised his target price from $5.40 to $6. This is a counter that is "locked, loaded and ready for take-off."
