FY24 earnings in line with surprise bump in dividend; raised FY25/26F dividend-per-share estimates and TP to SGD6.00

FY24 results largely in line, with a surprise dividend increase. ST Engineering (STE) delivered solid FY24 results, with core net profit (excluding satcom divestment, severance costs, and a one-off gain from the US marine business disposal) rising 18% y/y to SGD702m (consensus: SGD702m), driven by robust performances in its Commercial Aerospace (CA) and Defence & Public Security (DPS) segments. STE increased its final dividend per share to 5Scts (previously 4Scts), lifting the full-year dividend to a better-than-expected 17Scts.

Revenue rose 11.6% y/y to SGD11.3bn, meeting expectations. CA and DPS segments grew in the low-to-mid teens, whereas Urban Solutions & Satcom (USS) division saw limited growth due to project delivery timing and ongoing weakness in satcom. Nevertheless, management highlighted two reassuring revenue milestones: the Passenger-to-Freighter (P2F) business achieved SGD706m in FY24 revenue, hitting its initial target two years early, and revenue from the digital business surged 39% y/y to SGD645m, exceeding the 2026 target of SGD500m, partly boosted by inorganic growth from D’Crypt.

Group core operating margin continued its upward trajectory, improving to 9.0% in FY24 from 8.6% in FY23. CA’s core operating margin widened to 7.8% (FY23: 7.2%), exceeding expectations thanks to productivity improvements, a favourable revenue mix (slower P2F growth), and better margins on P2F as the program matures. DPS margin also slightly improved to 12.6% (FY23: 12.4%), impressive compared to historical levels. Conversely, USS remained a drag, with core segmental margins (excluding one-off divestment and severance costs) declining to 2.4% (FY23: higher), due to project milestone timing. However, management indicated early signs of stabilisation in satcom, with revenue rising 12% y/y and margins turning marginally EBIT-positive in 4Q24.

Contract wins rebounded sharply to SGD4.3bn in 4QFY24, including TransCore's foray into Southeast Asia, involving implementation of its tolling solutions across multiple highways and lanes The DPS segment secured a contract with Kazakhstan Paramount Engineering for an 8x8 armoured vehicle and won its first sale of NATO-standard 155mm shells. STE’s order backlog reached a record SGD28.5bn, with guided FY25 drawdown at SGD8.8bn (FY24: SGD7.9bn). Given typically around 70% of STE’s annual revenue is backlog-driven (remainder from short-term projects, spot contracts, and product sales), this suggests FY25 revenue could reach SGD12.5bn (+11% y/y).

Mid-teens core net profit growth appears increasingly achievable, supported by management’s optimistic outlook for FY25F.

Commercial Aerospace:

• Additional hangar capacity is planned annually for the next three years, with expansions in Ezhou, Changi Creek, and Pensacola adding an estimated 15-20% capacity.
• P2F operations will likely remain feedstock-constrained in 2025, though this is expected to ease as aircraft retirements resume with higher Airbus deliveries. Nacelle and composite floorboard output should match Airbus’s delivery growth guidance (~+7% y/y).
• Although overall MRO industry growth is anticipated to slow in 2025, STE expects to continue outpacing competitors.

Defence & Public Security:

• Management is confident in sustaining low double-digit margins in FY25 based on upcoming contract milestones.
• Despite significant international defence contract wins, management highlighted a robust global pipeline and active participation in bids in Europe and the Middle East.
• Singapore’s rising defence budget (+12.4% y/y in 2025) is also expected to augment growth.

Urban Solutions & Satcom:

• The segment could see a slight revenue impact (<2%) if President Trump forcibly removes the New York Congestion Pricing system. However, management noted there is increased interest from Europe and Asia, raising hopes for further TransCore wins in other markets this year.
• Encouraging progress in satcom’s transformation; increasing adoption of the next-generation Intuition platform, indicates a likely return to growth in 2025 after three years of declines, though margins will likely remain thin until Intuition achieves broader deployment.
• The base urban solutions business (excluding TransCore) is expected to continue robust growth driven by strong order momentum.

FY25/26F net profit forecasts unchanged, but dividend estimates raised. We project net income reaching SGD942m in FY26F, representing a robust 16% CAGR over FY24-26F, driven by growth across all segments, particularly USS, which has a lower base. Continued deleveraging and lower interest rates will also support earnings growth. We lifted FY25/26F dividend projections to 18Scts/20Scts (previously 16Scts), but see upside potential with the dividend payout ratio still lower than historical averages. Management to provide further clarity on capital allocation during STE’s upcoming Investor Day.

Maintain BUY, with an increased TP of SGD6.0, reflecting a higher P/E peg of 22.0x (+1.0 standard deviation, previously 20x) and updated DCF assumptions. We believe the higher valuation multiple is justified given greater conviction in the group’s growth trajectory and potential upside from international defence opportunities and inorganic expansion through M&A. While monitoring the risk of a potential trade war under Trump’s administration, we believe STE is well-equipped to manage tariffs, given the US commercial aerospace business largely sources domestically (though tariffs may lead to higher market prices), parts and components costs represent a relatively small component compared to labour expenses, and a portion of higher costs should be pass-through.

Although the stock has continued to outperform in 2025 following a stellar run in 2024, we remain bullish and maintain STE as our top pick within the Singapore aviation sector. We are optimistic that refreshed medium-term targets and further insights from the upcoming Investor Day will invigorate investor sentiment, especially given STE’s strong track record in meeting or exceeding past guidance.

 

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