The run makes the blue-chip stock the best performer on the Straits Times Index year to date. After hovering at a relatively tight range of around $4 for years, ST Engineering’s share price received this sudden flurry of market interest amid a broader rally led by European defence stocks in the past month or so.
Chong was careful to maintain that how his company’s share price moves is something he cannot control. Rather, what he can and what he and his team focuses on, is to continue to deliver better results. “I think if we can keep focusing on fundamentals, keep delivering on our objectives, then I think our stakeholders will appreciate that kind of progress, and we will just let the rest take its course,” he says.
On Feb 27, ST Engineering reported earnings of $702.3 million, up 19.7% y-o-y in FY2024 ended Dec 31, 2024. Revenue was up 11.6% y-o-y to $11.3 billion. To the cheers of investors, the company raised its final quarterly dividend to 5 cents, bringing the full-year payout to 17 cents, up from 16 cents for the past two years.
Additional market interest followed when ST Engineering articulated an updated set of growth targets at its 2025 Investor Day on March 18. Chong says that little in the company’s strategy has changed since its last investor day in 2021; it continues to be based on strong fundamentals and meeting objectives.
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He says: “We forecast a good recovery from Covid-19, especially for the commercial aerospace business. As we continue to put scores on the board, delivering against the targets that we set in 2021, I think that our stakeholders and the market appreciate those attainments, which I think is what’s been going on in the last couple of years as we continue to deliver against our targets.”
As at the end of December 2024, its order book stood at $28.5 billion, about double that of pre-pandemic days. The CEO says this provides healthy revenue visibility for the next few years and, therefore, allows for ambitious goals.
Among other goals, the company announced on March 18 that it is aiming for revenue of $17 billion come 2029, with net profit growth outpacing revenue growth by as much as five percentage points in CAGR. Defence and public security will remain its biggest business, with a segment revenue target of $7.5 billion, underscoring a very noticeable growth in the global market for weapons and security systems. Commercial aerospace (CA), meanwhile, will see $6 billion come FY2029, while smart city solutions, which span the DPS and urban solutions segments, is targeted to generate $4.5 billion.
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Chong is clear and confident about these targets, but he is also prepared that there will be “potholes” along the company’s “yield cum growth” story. To endear itself more to investors, ST Engineering has introduced a formula-based dividend payout policy. Following 17 cents to be paid for the whole of FY2024, it plans to pay a total of 18 cents for FY2025. From FY2026 onwards, it will be introducing a variable payout based on one-third of the increase in its earnings, with the remaining two-thirds to be reinvested to generate new growth or reduce debt. “We have many options, but minimally, we are telling our shareholders that a third of incremental profit, compared to the year before, will be paid out.”
While ST Engineering’s lofty share price has lowered its yield, Chong points out that the dividend commitment is in absolute terms instead of as a payout ratio, which gives shareholders better certainty. “As our net profit strengthens, we will pay out incremental profit in tandem and that’s an incremental dividend. We cannot control the share price, but we can provide clarity on how we pay the dividends. That’s the intent.”
‘Defensive’ earnings
Throughout the interview, Chong maintains that ST Engineering has no control over external factors, including the growing geopolitical uncertainties. Yet, the company is poised for further growth thanks to its ability to adapt and capture opportunities brought about by such uncertainties.
The group expects the addressable international defence market, or the international defence market in which ST Engineering sees potential for its solutions, to be above US$11 billion ($14.7 billion) over the next five years.
For context, its defence and public security segment reported FY2024 revenue of $4.9 billion, with contributions from contracts including a partnership with Kazakhstan Paramount Engineering (KPE) to produce 8x8 amphibious multi-purpose armoured vehicles and over $100 million in European ammunition orders for Nato-standard 155mm and 40mm rounds.
Chong says that the order wins are fruits from the steady building of its reputation and network over the years, especially in Europe and the Middle East. He recalls that at last year’s international security conference, the Shangri-La Dialogue, his team was kept busy meeting requests from delegates to visit facilities.
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“So when international conflicts erupted in the last few years, we were ready to work with our partners to address those opportunities. With defence budgets around the world expected to increase, I think we are in a good position to compete for more opportunities.”
Besides expanding its own production capacity, the company has a so-called localisation strategy as well when delivering contracts to overseas customers. “This includes our partners setting up local production, but we impart our technology to them, and we find that to be a very good model. You create economic value in the country and the capabilities are usually valued by the respective authorities in those countries because, in times of tension, it is critical that they own the supply chain and they own the know-how,” says Chong.
He adds: “Sometimes producing in-country, working with partners, doing technology collaboration, is a better set-up than exporting out of Singapore. But internally, we have also increased our capacity for some of our products, so it’s a two-pronged approach.”
Satcom blasts in orbit
The ST Engineering of today is a company years in the making, including a key reorganisation in 2021 executed by Chong in his fifth year as the CEO. The company was previously organised into four units: aerospace, electronics, land systems and marine; before shifting to the three domain-centric segments that are better suited to address market demand. “We are fortunate to have had a very successful execution or implementation of the new structure organisation. We’re glad that we made that change,” says Chong.
An engineer by training, Chong says he saw the need for change owing to a dynamic landscape. He continues: “I saw so many good strengths that this group had, thanks to our pioneers, who built a very strong foundation upon which to grow globally. I always had in my mind what we needed to do, and what worked well for us in the past, in some cases had to be adjusted, but they were also those that we had to continue building on.”
Besides organic growth, Chong is on the lookout for acquisitions, though he declined to provide more details. “We put acquisitions [through] a few filters. Is it strategic? Does it fit our growth strategy? Would it help us access new markets? Will it expand our value proposition? These are all factors when considering what we have in our pipeline,” says Chong.
One such example is the acquisition of cryptographic technology company D’Crypt for $67.5 million in December 2023. Chong calls this a “bolt-on” acquisition to beef up ST Engineering’s cybersecurity value proposition. He adds that integration has been smooth, and the business has yielded pleasing results within expectations.
Not all acquisitions have yielded the same success. In 2019, EUR250 million or $361 million was paid for the Belgium-based Newtec Group to bolster its satellite communications (satcom) business, which has expanded through its 2005 acquisition of US-based iDirect and Singapore-based satcom operations.
Relative to the steadily growing and larger defence and aerospace businesses, this unit has continued to be a laggard. The USS segment, as a whole, reported FY2024 revenue of $2.0 billion up just 1% y-o-y. Satcom, on its own, was down 14% y-o-y to $300 million for the year. However, in the most recent 4QFY2024, Satcom revenue was up 12% y-o-y.
Chong is confident that this business is recovering organically and has no need for another “bolt-on” acquisition or to put the unit up for sale, given his track record of 16 divestments since 2016.
“I don’t think anything is off the table, but for satcom, we are really focused on turning around, transforming the business. We keep repeating that message because we think that’s the most important task. But of course, we are not eradicating any possibilities; it all depends on what those opportunities are, but our focus really is to turn the business around.
“The satcom growth trajectory continues to be positive, but the industry is also going through disruption from new satellite operators. So, the long-term view of the industry is positive, but we do have short-term challenges; some are externally driven, and some are internally driven. But we have made good progress, and our efforts continue to turn the business around,” says Chong.
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