Such optimism was apparent at the investor day that one question to management was not whether ST Engineering could meet its FY2029 $17 billion revenue target but whether it could do so ahead of schedule.
CEO Vincent Chong is careful to manage expectations. “At times, there are factors that cause us to outperform, but there are also times when factors cause us to do not as well. One example would be in 2018, when we set our Investor Day targets, we didn’t expect Covid-19. On 2021 Investor Day, when Covid-19 hit, we gave you another snapshot of where we were. We were behind schedule by a year or two, depending on the particular targets that we set.”
He adds: “So I think there are always upside and downside possibilities, but the $17 billion is a balanced target at this time.”
In addition to the financial targets, the company laid down a clear dividend policy that promises a higher payout. In addition to 18 cents per share to be paid for FY2025, the FY2026 dividend will include a variable component of one-third of the earnings growth generated that year.
In her March 18 report, Morningstar’s Tan estimates that this means the company’s payout ratio will slide to 54% in FY2029 from 76% in FY2024, while the group’s five-year dividend CAGR of 7.1% is slower than her previous assumption of 8.9%.
She writes: “With higher cash retained, we think ST Engineering should be poised to make material acquisitions from FY2028, depending on the size.”
Tan, who raised her fair value estimate on the stock to $6.50 from $5.60 previously, has a three-star rating against Morningstar’s five-tier scale. “Given the narrow-moat ST Engineering’s share price run-up, we think ST Engineering is currently fairly valued. In our view, room to the upside depends on the company’s possible acquisitions to boost earnings further.”
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Tan believes that the FY2029 revenue target of $6 billion for the commercial aerospace segment is “somewhat conservative”. She estimates that this could be achieved in FY2027.
Jeffrey Lam, ST Engineering’s group COO and president of commercial aerospace, says: “As part of our portfolio, the group will increase capacity in the maintenance, repair and overhaul (MRO) space, as well as adding 15% to 20% more capacity in the next two years. When we look at the industry growth rate of around 3% to 3.5%, we are projecting that we will double that rate up to 7% across the whole portfolio. So we think that on balance, that’s actually a good projection.”
He adds: “Obviously, we would want to achieve better, and we will be working to fulfil more financial share and penetrate more new markets so that we can grow at a much faster rate than industry growth rates.”
OCBC Investment Research notes that ST Engineering has outperformed the market by a wide margin year to date, but thanks to its “solid fundamentals” and “positive sentiment” for global defence plays, there is room for further gains. “The group remains well-positioned to ride on aerospace and defence capex upcycle, and there are positive structural trends as well for the (USS) segment over the longer term,” says OCBC, with a revised fair value of $7.75 from $6.30.
As the company continues to establish itself as a global defence stock, this means more business and revenue stemming from international contracts. It also means more exposure to global dynamics, such as US President Donald Trump’s tariff-based approach to certain economies.
CEO Chong says that while it is too early to tell what the impact of tariffs will be on the group’s business, around 30% of group revenue is generated from the US and the bulk of its raw materials are also purchased from the country.
“At the margins, maybe there are some second or third order impacts from carriers, but we don’t believe we are disadvantaged against our competitors. The direct first-order impact is not obvious at this time, we don’t think it’s zero, but the second and third order effects that the world will see, I don’t think we’re going to be immune to that. We’re monitoring the situation,” he says.
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