• Defence poised for upside surprise as surging international procurement meets years of groundwork in marketing, R&D and partnerships
• Rising urgency should accelerate Smart City adoption and lead to positive surprise relative to medium term targets
• Potential M&A provides additional torque, underpinned by strong execution track record and balance sheet capacity
• Historical valuation benchmarks no longer do justice to STE’s higher growth trajectory; notable PEG discount and earnings visibility justify TP raise to SGD7.50

STE handily outperformed its 2021 Investor Day scorecard, and new targets signal a fresh era of growth for the group. STE has significantly exceeded its 2021 Investor Day targets, meeting several of its 2026 objectives two to three years ahead of schedule (as shown in the table on the right), underscoring the strength of its execution. We were pleasantly surprised by STE’s 2025 Investor Day targets, which call for a high single-digit CAGR in revenue and low-to-mid teens growth in net profit, substantially above the 7.7% net profit CAGR recorded between FY20–24. While the group has guided for healthy top-line growth across all segments, we are excited about the group’s high-single-digit revenue guidance for the defence and public security segment, which enjoys the highest margins.

We are also encouraged by STE’s emphasis on cost control. Building on SGD0.9bn in savings achieved between FY20–24, the group aims to capture an additional >SGD1.0bn (annual savings of >SGD0.2bn) in efficiencies through procurement initiatives, automation, AI-driven manufacturing (robotics, AI-based quality control, predictive maintenance), AI-assisted supply chain optimisation (predictive analytics for inventory and logistics), and an upgraded ERP system.

The only less positive update is the group’s new dividend policy: STE has planned for 18.0Scts dividend per share for FY25 and will increase future dividends by one-third of the incremental net profit in subsequent years (additional SGD33mn dividends for every SGD100mn increase in net profit). While special dividends remain a possibility if the group’s capital position allows, we think investors would have welcomed a stronger focus on returning capital, particularly given the company’s guidance for solid free cash flow generation over the next five years (annual capex of roughly SGD500mn and multiple initiatives to optimise working capital).

Maintain BUY with higher TP of SGD7.5; multiple factors could translate into positive surprises for the group’s medium-term targets. Despite the stock’s strong performance over the past year and YTD-2025, we argue that valuations remain attractive relative to global peers after factoring STE’s transition into a new exciting growth phase. Additionally, we foresee 1) strong potential for more defence exports, 2) burgeoning demand for smart city solutions, and 3) more acquisitions pushing the group’s bottom-line growth to 15-20% from low-to-mid teens over the next five years. Hence, we reiterate our BUY call with a higher TP of SGD7.50 as we raise our P/E peg and update our DCF assumptions.

STE 2021 Investor Day Scorecard

 
STE WELL positioned for DEFENCE export breakout

Defence spending in Europe and the Middle East has surged over the past few years. Considering the dramatically different security landscape today, we believe that defence spending in Europe and the Middle East, the two regions directly involved in conflicts over the past few years, will be on a long-term upswing. Total Europe defence expenditure in 2024 amounted to EUR326bn, up sharply by 52% compared to 2021 (prior to the Russia-Ukraine conflict), representing around 1.9% of GDP. Notably, spending on equipment procurement and R&D increased by an even greater magnitude of 96.2% between 2021-2024, and now accounts for 31% of total defence spending in 2024, up from 24% in 2021. Similarly, estimates from Forecast International show that defence spending by the Middle East and North Africa rose 15.6% y/y to USD220.6bn in 2024.

Looking ahead, we anticipate a paradigm shift in European defence spending. Until recently, European nations were planning to allocate between 2–2.5% of GDP towards defence by 2030. However, the region is now preparing to rearm on a scale not seen in decades. The European Commission’s ReArm plan would mobilise up to EUR800bn in defence spending over several years, and this could dramatically lift defence spending in the region by up to 1.5% of GDP (to 3–3.5%) annually, with an emphasis on reducing its reliance on US support, modernisation and rebuilding depleted stockpiles. As shown in the table on the right, Europe’s total defence expenditure could rise by 9–12% CAGR between 2024 and 2030, with equipment procurement growing at a faster 12–17% CAGR during this period, as countries focus on replacing ageing equipment, strengthening military capabilities, and refilling arsenals.

Defence expenditure in the Middle East is also likely to remain on an uptrend even as conflicts de-escalate. Estimates by Forecast International point to defence spending in the region growing at a 3.0% CAGR over 2024–2029, as governments respond to an increasingly volatile security environment and heightened threat perceptions, where conflicts involving Israel, Iran (including its nuclear ambitions), Hezbollah, and Yemeni insurgents have exposed gaps in regional capabilities and intensified the procurement of advanced equipment, with many countries in the midst of multi-year military modernisation programs. Additionally, many states are also increasingly focused on cultivating domestic defence industries through technology transfers and joint ventures.

We believe there is upside to STE’s international defence growth trajectory. As a recap, STE clinched USD1.7bn of international defence contracts between 2021-2024, compared to an addressable market of USD5.0bn between 2022-2026. The group has guided for a wider addressable market of over USD11.0bn over 2024-2029, more than double the figure back in 2021. However, we believe that there is potential for STE to exceed its target due to the following reasons:

• STE has spent the past few years laying down the foundation, including building their presence in the international scene through marketing, defence exhibitions and live demonstrations. Additionally, the group has also inked many partnerships with leading defence contractors, including Babcock, Rheinmetall, Saab, Saudi Arabian Military Industries (SAMI), Kazakhstan Paramount Engineering (KPE), EDGE Group and Israel Aerospace industries. We believe the partnerships forged during 2018–2025 are likely to continue yielding new co-developed technologies and contract opportunities.
  
  
• Deferred modernisation needs and buffer-building will be prioritised. Global ammunition stockpiles have been drawn down to perilously low levels by recent conflicts. In addition to replenishing supplies provided to Ukraine, NATO aims to rebuild to pre-war levels and then establish additional buffers to enhance readiness for worst-case scenarios. Furthermore, years of underinvestment prior to recent conflicts have led to considerable pent-up modernisation requirements.
  
  
• Europe’s defence contractors are in overdrive, suggesting that imports are required to fill the gap. The combined order backlog of the seven largest European defence primes surged to EUR303bn in 2024, up 75% from 2021, and now represents 3.4 years of revenue (vs. 2.6 years in 2021). While the ReArm plan prioritises a ‘Made in Europe’ approach, prime contractors are struggling with long lead times and capacity constraints, limiting how quickly Europe can rearm. As Europe looks to reduce its security reliance on the US, new opportunities will emerge for contractors from other allied countries.

STE is well-positioned to meet urgent defence needs in the Middle East and Europe. Combat-proven platforms like the Bronco all-terrain carrier and the hybrid-electric Terrex 8x8, both designed for modular deployment across diverse missions. These are complemented by key subsystems, including G-DEX digital mortar systems, turreted weapon stations, and electronic warfare suites. Building on its strong track record in 40mm grenade production, STE can also provide NATO-standard 155mm shells. Meanwhile, its expertise in sensor integration and scalable co-production ensures adaptable solutions for modern, high-intensity operations.

increasing urgency for smart city solutions

Smart City solutions are becoming much more essential. According to TomTom’s traffic index ranking, 379 of the 500 tracked cities (76%) experienced slower average travel speeds in 2024 compared with the previous year. Although the pandemic briefly eased congestion, the lifting of restrictions, return-to-office policies, surging e-commerce deliveries, and a rebound in tourism and business travel have pushed many urban networks beyond pre-pandemic levels. Additionally, cities such as Jakarta, Bangkok, and Manila consistently rank among the most congested worldwide, and an Oliver Wyman study indicates that many Asian cities continue to fare poorly in transit infrastructure, highlighting significant room for improvement.

With the United Nations projecting the global urban population to rise from 57.3% in 2023 to approximately 68% by 2050, and cities already responsible for nearly 70% of global carbon emissions, governments worldwide are under mounting pressure to future-proof urban environments by investing in energy-efficient building systems, and digital infrastructure for security and environmental monitoring. At the same time, the worsening of traffic conditions globally reinforces the urgent need for smart mobility solutions. Energy crises and climate-induced disasters have further exposed how legacy systems are unfit for modern urban risks, driving governments to accelerate investments in smart grids, adaptive mobility, and real-time surveillance and emergency response systems.

STE is primed to tap into this growing demand through its comprehensive suite of Smart City solutions. Its smart mobility offerings include tolling systems and traffic-flow management, supported by TransCore, whose first tolling contract in Southeast Asia highlights the group’s ability to cross-sell solutions into new markets. These capabilities are built on a modular and scalable technology architecture that allows cities to begin with targeted deployments and expand into fully integrated systems, as demonstrated by the group’s smart city operating system in Lusail City, its first full-scale implementation outside Singapore.

Beyond mobility, ST Engineering has deployed more than 17 million sensors across applications such as smart street lighting, water metering and environmental monitoring, while its smart energy management system has achieved up to 25% energy savings. Notably, its cybersecurity operations span more than 20 countries, safeguarding critical infrastructure across transportation, energy, finance and healthcare sectors. These capabilities are further reinforced by its digital strengths in cloud services, AI analytics and green-certified data centers, aligning with public sector priorities in sustainability and digitisation. As cities respond to climate imperatives, urbanisation and security challenges, we believe that there could be upside to growth estimates for this segment over the medium-term. 

Congestion levels across key cities

Oliver Wyman Urban Mobility Readiness Index (2024)

M&A not factored in the growth equation

M&A remains a wild card, but we like the odds. Over the past several years, STE has executed a series of bolt-on (Glowlink, D’Crypt) and large-scale acquisitions (MRAS, Newtec, TransCore), and we believe that the majority of these have delivered broadly positive outcomes. Post-acquisition, Newtec has likely contributed low single-digit earnings accretion (although it is currently facing considerable challenges), while MRAS and TransCore are estimated to have driven high single-digit and low-double digit accretion respectively, with MRAS arguably being the group’s best-executed deal to date.

While financial leverage remains notably higher versus pre-TransCore levels (given the deal was entirely debt-funded), we believe STE remains comfortable deploying more debt for M&A, supported by ~SGD700mn in debt repayments over the past two years, meaningful improvements in credit metrics (especially net debt to EBITDA given rising earnings), and our expectation of strong free cash flow generation in the coming years.

With one of the highest credit ratings in the sector, we note that STE’s cost of funding remains highly competitive relative to peers across its key segments (MRO, Defence, Smart City). Given its strong track record, we expect further acquisitions in the coming years, likely in the Commercial Aerospace or Smart City (cybersecurity, smart mobility, digital infrastructure) domains, either to broaden its geographical reach or enhance its capabilities vertically or horizontally.

Proactive portfolio optimisation efforts support a more resilient and focused earnings profile. Since 2016, the group has divested or ceased 16 non-core operations, including the successful divestment of its loss-making US marine business, which had long faced structural challenges, subsequently resulting in a strong boost to segmental margins. While the group has not explicitly stated plans to divest its Satcom business, the segment has underperformed in recent years and continues to face industry headwinds. Management has acknowledged these challenges and is pursuing a turnaround through cost transformation, product innovation and platform upgrades, but if the business remains structurally unprofitable or misaligned with the group’s core growth pillars, it may eventually be considered for divestment under the group’s disciplined capital allocation framework.

Breakdown of past major acquisitions

Valuation and Target Price update

Undemanding valuations relative to peers despite strong share price performance and solid fundamentals. Having rallied more than 45% YTD-2025 and over 65% in the past year, STE is now trading at 24.5x forward P/E, which is more than 2.0 standard deviations above its five-year trading range and over 3.0 standard deviations above its historical trading range. However, we believe historical valuations are no longer a relevant yardstick, as STE is entering a much faster growth trajectory, as shown in the table on the right. Its new five-year bottom-line growth target of approximately 11% is about three times its historical growth profile of 2–4%. Benchmarking STE against peers, we believe its current valuation remains compelling, given its growth prospects. STE is trading at 1.4x PEG, compared to 1.2x for other MRO operators, 1.7x for global defence contractors, and 1.8x for global Smart City plays.

Maintain BUY with a higher TP of SGD7.50. While our FY25/26F earnings estimates remain largely intact, we raise our TP to SGD7.50, reflecting: (1) a higher target multiple of 26.0x blended FY25/26F EPS pegged to 1.6x PEG (average of peers across the three segments), and (2) a higher DCF-based TP driven by our increased longer-term earnings growth assumptions and lower reinvestment estimates, following STE’s focus on working capital optimisation and limited capex requirements. Overall, we view the current risk-reward setup as favourable, underpinned by management’s solid track record and strong execution, high earnings visibility due to its substantial order backlog, and relatively minimal impact from tariffs at this juncture. Although some investors might have preferred a stronger focus on capital returns, we believe any capital accumulation will eventually be deployed for additional M&A, bolstering the group’s earnings profile.

STE’s historical trading range and earnings growth