With the fast and furious surge, ST Engineering’s current share price has overshot the wave of raised target prices after the company on Feb 27 reported its FY2024 ended December 2024 earnings growth, further buttressed by a bullish medium-term outlook painted by the management less than a month later.
Following the company’s 1QFY2025 business update, analysts have downgraded their calls but raised their target prices to catch up with the trading range of ST Engineering’s shares.
“While we like ST Engineering for its growth potential, valuation appears rich and we prefer a better entry point,” writes Roy Chen of UOB Kay Hian, who has downgraded his call to “hold” from “buy” but raised his target price from $6.80 to $7.37.
Similarly, Citi Research’s Luis Hilado has downgraded his call from “buy” to “neutral” on valuations. “Given the halo effect from ST Engineering’s defence and public security and an overall continued healthy order flow in 1QFY2025 and into the longer-term, we believe the market continues to value the stock on its long-term prospects,” says Hilado, who has tweaked his valuation to 22.5 times FY2027 estimated earnings from FY2026’s, which is +1 standard deviation over its 10-year mean, thereby deriving the target price of $8.30 from $7.22.
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“We believe the combination of its defence business and an overall defensive business structure will continue to drive the market’s view of ST Engineering’s long-term prospects and guidance,” adds Hilado, who is “aligned” with the company’s bullish guidance to FY2029, where revenue is to reach $17 billion.
In 1QFY2025, ST Engineering has shown that its growth momentum is ongoing. Total revenue in the period grew 8% y-o-y to $2.9 billion, led by its defence and public security segment, which marched ahead with its revenue up 18% to $1.32 billion. The other major business segment, commercial aerospace, had a soft quarter, with revenue merely increasing 0.1% y-o-y to $1.15 billion. The smallest unit, urban solutions and satellite communications, was up 4% y-o-y to $446 million.
Growth visibility is clear, though. In 1QFY2025, ST Engineering won new contracts worth $4.4 billion to bring its total order book to $29.8 billion as at March 31, with around $7.3 billion expected to be delivered for the rest of the year.
Maybank Securities’ Krishna Guha, following the 1QFY2025 results, kept his “buy” call and hiked his target price from $7.10 to $8.30. He likes the stock for visible earnings growth and the continued healthy demand for defence solutions worldwide.
“However, we need to monitor demand risks posed by tariffs. Management indicated commercial aerospace may be impacted, although mitigating plans are in place,” cautions Guha in his May 12 note.
Guha warns that commercial aerospace revenue may be deferred as a first-order effect. “Cascading effects on extended supply chains may be mitigated by cost pass-throughs, stockpiling of inventory and activating/shifting capacity to other regions, which may affect near-term margin.”
PhillipCapital’s Paul Chew notes that while the lack of aircraft has been a drag on passenger-to-freighter (PTF) revenue, this could also lead to increased flying hours and extended use of engines on operating aircraft, leading to more maintenance, repair and overhaul (MRO) work for the CA segment.
Besides more MRO work, Chew is cheered by the “robust demand” in ammunition and “platforms” from defence and public security customers. “Countries are raising defence budgets and diversifying their supply base,” says Chew, who is keeping his “accumulate” call along with a higher target price of $8.20 from $6.10.
As for RHB Bank Singapore’s Shekhar Jaiswal, who is maintaining “buy” and a target price of $8.30, ST Engineering’s order book of $29.8 billion equates to around 2.6 years of forward revenue visibility.
“Management anticipates recognising $7.3 billion from this backlog in the remainder of 2025, versus our forecast of $9.6 billion for the period,” adds the analyst.
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Jaiswal also sees that while the direct cost impact of US embargoes on the group is not material, management continues to monitor developments closely, particularly China’s engine MRO operations that rely on US parts.
He notes that the group’s tariff mitigation measures include diversifying suppliers, establishing alternative service locations, renegotiating terms, and stockpiling critical inventory.
On foreign exchange rates, Jaiswal highlights that a natural hedge exists between US dollar-denominated revenue and costs, and a 1% US dollar and Singapore dollar move translates to roughly a $2 million profit and loss swing.
