ST Engineering: 3Q25 results largely in line; upgrade to BUY on imminent satcom divestment and international defence momentum
- Upgrade to BUY with a higher TP of SGD9.40 to reflect positive earnings adjustments; imminent satcom divestment a re-rating catalyst
- Results in line, with 9M25 revenue at 73.5% of street’s full-year estimate
- Broad-based growth across all segments; CA led with a 22% y/y growth, though satcom remained weak
- Satcom impairment reset base, removing amortisation drag; 5Scts special DPS declared
3Q25 revenue in-line with expectations. Group revenue rose 12.9% y/y to SGD3.1bn, bringing 9M25 revenue to SGD9.1bn (+9% y/y), 73.5% of the street’s full-year forecasts and in line given seasonally stronger 4Q contributions. Segmentally, Commercial Aerospace (CA) remained the growth driver with 22% y/y growth to SGD1.3bn on robust engine MRO and nacelle output, partly offset by lower passenger-to-freighter (P2F) conversions amid limited feedstock and OEM delivery delays. Defence & public security delivered 5% y/y growth to SGD1.3bn (+7% ex-LeeBoy), underpinned by strong international momentum across land systems, naval, and munitions programmes. USS revenue climbed 15% y/y to SGD522mn, led by Urban Solutions while Satcom remained a drag.
Healthy contract momentum sustained. 3Q25 contract wins totalled SGD4.9bn, implying a robust book-to-bill ratio of 1.6x and lifting the order backlog to a new record of SGD32.6bn as of end-Sep 2025. The Defence and Public Security segment accounted for the largest share of new orders, spanning AI-powered 5G edge systems, cybersecurity solutions, munitions and hybrid electric vehicles for international customers, as well as several naval contracts. Commercial Aerospace also performed well on the contract front, securing long-term engine MRO agreements and Airbus A380 heavy airframe maintenance work, while Urban Solutions saw more smart mobility wins for rail and road.
Satcom impairment cleans slate for recovery. A SGD667mn non-cash impairment was recognised for the iDirect group, effectively eliminating all goodwill and most intangibles associated with its Satcom operations and reducing the carrying value to SGD170mn. The impairment was driven by slower customer adoption of the Intuition multi-orbit platform, rising NGSO competition, weaker GEO activity, and continued revenue and EBITDA pressure. The group is actively exploring strategic options for the iDirect business but is leaning towards a divestment. While the timing of the transaction remains uncertain, the write-down has already removed the bulk of intangible assets linked to iDirect. This means annual amortisation charges of roughly SGD50mn will cease from FY26F, providing a recurring uplift to operating profit and margins even before any divestment gains are realised.
Special DPS of 5Scts declared, representing roughly 25% of total divestment proceeds (LeeBoy, SPTel, CityCab) and bringing total FY25 dividends to SGD0.23/share (~2.8% yield).
Satcom divestment to be a key re-rating catalyst. Management confirmed “active and high-energy” negotiations for the sale or restructuring of the Satcom business, with an update expected within the coming months. The eventual divestment is expected to remove a structural earnings drag and materially enhance USS segment margins, with limited strategic implications for the Smart City portfolio given minimal operational overlap. We estimate Satcom’s FY25 EBIT loss at around –SGD98mn; its removal could lift group FY26F EBIT by c.8-9%. The absence of Satcom-related capex following the divestment will also lower the group’s future capital intensity and strengthen free cash flow generation. The Satcom business will likely be valued on an EV/sales basis, as EBIT, EBITDA, and book value are currently negative, with comparable peers trading at around 1-2x EV/sales, implying a potential valuation range of SGD270-540mn.
Commercial Aerospace growth outlook robust. Engine MRO momentum remains strong amid a persistently tight global capacity environment, with airlines still facing long turnaround times for maintenance slots. Supply chain conditions are gradually improving, and STE’s turnaround times have continued to shorten. Management highlighted that utilisation across its airframe, engine, and component facilities remains high, supported by flexible hangar allocation between P2F and airframe MRO work to sustain throughput. Subdued P2F activity, caused by limited feedstock as airlines delay aircraft retirements, is expected to persist going into FY26F, although the long-term freighter demand outlook remains intact. The shift in capacity mix toward MRO work should support segmental margins, as MRO activities generate higher profitability than P2F conversions. Full-year CA revenue is guided to grow at low-double-digits, driven by robust engine overhaul demand, rising nacelle output, and better pricing.
Defence momentum solid; international expansion ahead of plan. The segment is executing a broad pipeline of programmes across land, naval, and munitions domains, with new market penetration in South America marking its first munitions export to that region. Management also cited active pursuits for the Bronco and 8x8 platforms in Europe and the Middle East, as well as new vessel opportunities in Asia-Pacific. Several large international defence contracts are expected to close by year-end or early FY26F, with the international business tracking ahead of the five-year plan. Management also guided for low-double-digit growth for the sector excluding divestment impact.
Urban Solutions margins are solid ex-Satcom. Urban Solutions continues to perform well, driven by TransCore’s major tolling and traffic management projects in the US, along with smart mobility (rail & road) across Asia. EBIT margins for USS excluding Satcom stood at c.7.9% in FY24 and are expected to improve further post-divestment as more projects progress from the EPC to O&M phase. STE guided a for y/y improvement in segmental revenue.
We lift our FY26F and FY27F core earnings estimates by 10.6% and 13.1%, respectively, while marginally raising our FY25F core net profit estimate by 4% to reflect stronger-than-expected momentum in the Commercial Aerospace and lower satcom intangibles amortisation. The upward revisions to FY26/27F are premised on the assumption that the Satcom business is fully divested by 1Q26, removing its structural earnings drag, and are further supported by robust order win momentum and pipeline strength in the Defence segment, which carries the highest margins and will consequently lift group operating margins. We are also more constructive on the Commercial Aerospace sector, as the impact of tariffs should remain minimal and supply chain conditions continue to improve based on our channel checks.
Upgrade to BUY with a higher TP of SGD9.40, up from SGD8.20 previously, reflecting our positive earnings revisions and updated DCF assumptions that factor in slightly lower capital intensity following the potential Satcom divestment. We find valuations compelling after the recent share price correction, with the current risk-reward profile turning favourable given the group’s clear earnings visibility and accelerating growth trajectory. Our revised forecasts now imply a 19% core EPS CAGR over FY25-27F, up from 13% previously.
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