- The EU initiative for mandatory ammunition stockpiles and the escalating Middle East conflicts are expected to drive new international defense contracts for ST Engineering.
- Increased utilization of older aircraft and new hangar facilities in the US and Singapore to alleviate capacity bottlenecks will benefit ST Engineering’s MRO sector.
- With 40% of its debt in floating rates, ST Engineering is poised to benefit from quicker-than-expected Fed rate cuts.
With international defense spending looking to increase, particularly in Europe and the Middle East, and a thriving maintenance, repair, and overhaul (MRO) landscape in the US, Singapore Technologies Engineering Ltd (SGX:S63), or ST Engineering, appears set to maintain its upward trajectory.
The company has demonstrated resilience through consistent contract wins and strong financial performance, including a 14% year-over-year (YoY) revenue increase to S$5.52 billion in the first half of 2024 (1H2024), and a robust order book of S$27.9 billion as of end-June.
Growth Outlook
Defense Order Opportunities
ST Engineering is poised for further defense contract wins due to several key drivers:
- European Union Initiatives: The incoming EU defense commissioner is pushing for member states to maintain mandatory ammunition stockpiles, creating significant opportunities for ST Engineering, considering Europe’s underdeveloped defense industry.
- Middle East Tensions: Escalating conflict in Lebanon and other parts of the Middle East is likely to result in increased defense spending, benefiting ST Engineering’s international contracts.
- Tight Ammunition Production in Europe: Limited production capacity in European ammunition factories presents an opportunity for ST Engineering to secure higher-margin contracts in this area.
ST Engineering has consistently clinched international defence contracts in Europe and the Middle East since 2Q23. In 1H2024, ST Engineering’s defense segment showed strong performance with an Earnings Before Interest and Taxes (EBIT) of S$324 million, up 8% YoY. Management expects these margins to be sustainable, with rising demand for 40mm and 155mm ammunition driving continued investments in production capacity and automation.
MRO Sector Expansion
With new aircraft deliveries remaining muted, the utilisation of older aircraft has increased, benefiting the MRO sector. ST Engineering is well-positioned to capture this momentum, with new hangar facilities in the US and Singapore set to alleviate capacity constraints. In 1H2024, ST Engineering’s MRO revenue grew by 32% YoY. ST Engineering’s US-based competitor, AAR Corp, highlighted that the underlying demand for MRO services remained strong in its recent earnings briefing, pointing to sustained industry growth.
Strong Fundamentals
- Good Financial Performance: In 1H2024, ST Engineering achieved S$5.52 billion in revenue, a 14% increase YoY. Core net profit also rose to S$337 million, up 21% YoY. The company held S$430 million in cash and cash equivalents as of June 30, 2024.
- Reduced Interest Costs: With around 40% of its debt being floating-rate, ST Engineering stands to benefit directly from quicker-than-expected Fed rate cuts. The company’s total borrowings, primarily denominated in USD, stood at S$6.1 billion as of 1H2024.
- High Order Book: ST Engineering’s order book remains strong at S$27.9 billion as of June 2024, with S$4.9 billion scheduled for delivery in the second half of the year. In 1H2024, the company secured S$6.1 billion in new contracts, including S$3 billion in 1Q2024 and S$3.1 billion in 2Q2024.
Looking Ahead
ST Engineering’s growth prospects remain strong, bolstered by favorable trends in both the defense and MRO sectors. However, key risks such as a global economic slowdown could affect order wins and aerospace activities. Prolonged supply chain and labor challenges could also exert pressure on margins. Nonetheless, with solid financials, a growing order book, and investments in key growth areas, ST Engineering is well-positioned for continued success.
Disclaimer: ProsperUs Manager of Content Hailey Chung doesn’t own shares of any mentioned companies.
References
CGS International Company Note | ST Engineering | Oct 2, 2024
CGS International Company Note | ST Engineering | Aug 14, 2024
ST Engineering 1H2024 News Release
