However, with thousands of non-geostationary satellite launches over the past few years, GEOs have lost market share, denting iDirect’s prospects and ST Engineering’s profitability. ST Engineering says it is exploring “options” for the satcom business which is interpreted by market observers as another way to describe putting it up for sale.
ST Engineering CFO Cedric Foo says that the beleaguered unit has been “working hard” to reverse its financial performance, including “rightsizing of the workforce”.
“iDirect has reduced its headcount by more than 20% from about 1,400 in 2022 to 1,100 in 2024,” shares Foo. “This initiative has resulted in a $60 to $76 million cash savings annually, but unfortunately, it’s insufficient to turn in a profit”.
To reassure investors, ST Engineering has laid down prospects of higher dividends for the current 4QFY2025. On top of the regular interim dividend of four cents per share for the quarter, ST Engineering plans to pay a final dividend of six cents for the current 4QFY2025, plus a special dividend of five cents per share, bringing full year FY2025 payout to 23 cents. In contrast, it paid a total of 17 cents for FY2024.
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Following the update, analysts from DBS Group Research, CGS International and OCBC Investment Research continue to see much positive upside for ST Engineering thanks to earnings growth and with satcom a drag not much longer, while analysts from Morningstar and Citi remain neutral.
“Following the imminent divestment of its loss-making Satcom business and stronger order win momentum, we now forecast core net profit to grow at a 19% CAGR for FY2025 to FY2027, up from 13% previously,” states Jason Sum of DBS, who has raised his target price from $8.20 to $9.40.
Lim Siew Khee and Meghana Kande of CGSI are similarly positive, cheered by the possible sale. “We are positive that STE is preparing a way to explore strategic options for its loss-making iDirect, which was one of our previous key catalysts,” state the analysts in their Nov 13 report, where they’ve raised their target price from $8.70 to $9.50.
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OCBC’s research team was the most bullish, valuing the share price at $9.80, up from $9.03.
Satcom woes aside, Sum believes that both the defence and smart city segments could exceed management targets, and that the commercial aerospace has a robust growth outlook too, thanks to strong demand for engine maintenance, repair and overhaul (MRO) services.
The analyst noted several downside risks, including a slowdown in global flight activity, renewed supply chain disruptions in commercial aerospace, delays in project execution for urban solutions, and timing risks pertaining to defence contract awards and deliveries.
Lim and Kande estimated that iDirect’s impairment will be partly mitigated by approximately $50 million in amortisation savings, with the potential for an additional $89 million from the divestment proceeds. In addition, gains of $258 million from divesting the likes of US construction equipment unit LeeBoy, broadband venture SPTel and taxi venture CityCab, will help buttress the drop.
On Nov 17, ST Engineering announced yet another divestment. After running a joint venture with China Eastern Airlines for more than two decades, ST Engineering plans to sell its 49% stake in the MRO joint venture to its partner for $124.6 million. It is expected to book a one-off gain of $48.1 million from this transaction.
OCBC, on its part, is upbeat that ST Engineering’s “core businesses continue to perform well, supported by robust order book and contract pipeline, and disciplined capital management to unlock values”. Potential catalysts include a recovery in the aerospace segment, more significant contract wins and higher-than-expected margins.
OCBC, which has raised its fair value from $9.03 to $9.80, warns that risks may come from lower oil prices that could impact the marine business, lower-than-expected margins for new projects, integration challenges from acquisitions, and a longer-than-expected recovery in the aerospace sector.
In contrast, other analysts remain neutral on ST Engineering, mainly on valuation grounds. Morningstar’s Lorraine Tan believes the firm is fairly valued at 23.5 times P/E, backed up by EPS CAGR of 24%, and is thus maintaining her “hold” call at $8.10.
Citi’s Luis Hilado warns that the impairment of iDirect could cause “near-term share price pressure”. Nonetheless, the special dividend, stronger defence and public security orders, and potential “strategic options” for iDirect are likely to mitigate any “sustained correction”. However, the Citi analyst did not revise his target price of $8.75.
