ST Engineering Ltd (SGX: S63) or STE has seen its share price skyrocket to fresh all-time highs last month, driven by strong demand across the defence and aerospace sectors.
Will this strong performance continue, or does turbulence lie ahead?
Why ST Engineering has rallied
STE reported strong results for 2025’s first half (1H2025):
- Revenue was up by over 7% year on year (YoY) to S$5.9 billion.
- Earnings before interest and tax (EBIT) came in at S$602 million or a 15% increase compared to a year ago.
- Net profit was S$403 million, up 20% YoY.
This growth is driven by positive business momentum across the company’s three business segments, namely Commercial Aerospace, Defence & Public Security, and Urban Solutions and Satcom.
Commercial Aerospace (CA) continues to benefit from the recovery in the aerospace industry post-pandemic, with steady demand for the company’s MRO (maintenance, repair, and overhaul) activities.
Overall, the segment reported revenue of S$2.35 billion, up 5% YoY with EBIT rising 18% over the same period to S$223 million.
The segment’s EBIT represented 40% of STE’s revenue, and 37% of its EBIT.
Defence & Public Security (DPS) saw strong order book momentum with contracts won in 1H2025 totalling S$4.2 billion compared to S$2.6 billion in 1H2024, a 61.5% increase in a year.
The segment delivered revenue of S$2.6 billion, an increase of 12% YoY and EBIT of S$367 million, up 13% YoY, contributing 45% and 61% of the STE’s revenue and EBIT, respectively.
In contrast, Urban Solutions and Satcom (USS) remained stable.
In 1H2025, the segment reported revenue of S$921 million, flat YoY and EBIT of around S$12 million, an increase of 32% YoY, representing 16% and 2% of the company’s revenue and EBIT, respectively.
Overall, STE’s strong business performance, especially from its CA and DPS segments, led to the rally of the share price, with the stock up 70% year to date (YTD), as of last Friday, compared to the Straits Times Index’s (SGX: ^STI) gain of around 13.7%.
Strong tailwinds underpinning key segments
The global travel and tourism industry is projected to hit 30 billion tourist trips annually by 2034, driving structural demand for aerospace services.
STE’s global presence of hangars and long-established safety and reliability track record positions it well to capture this growth.
With hangars in the US, Europe, Singapore, and China, the company can provide critical MRO services at a fraction of the cost, with shorter downtime for its customers.
The CA’s segment’s EBIT margin held steady at just under 10%.
Global defence spending is projected to reach US$2.56 trillion in 2025, a projected increase of 3.6% YoY.
This growth is driven by increased defence budgets, particularly in Europe, the Middle East, and Northeast Asia.
With ongoing conflicts such as Russia’s invasion of Ukraine, Israel-Palestine, and heightened tensions surrounding the South China Sea, this structural trend is likely to persist.
STE’s strong reputation in the industry, being Singapore’s main defence contractor, enables the company to leverage this tailwind through the sale of defence equipment and systems.
DPS’s EBIT margin has been resilient at close to 14%.
The global smart cities and digital solutions market is expected to grow at a compounded annual growth rate (CAGR) of 17.7% from roughly US$851 billion in 2025 to over US$1.9 trillion in 2030.
The USS segment is well-positioned to capitalise on this growth with its comprehensive product offerings in connectivity, mobility (rail, road, and security), infrastructure, and environmental solutions.
When we zoom back out, STE’s recent strong business performance is expected to continue, supported by its robust order book and healthy outlook.
As of 1H2025, its current order book stands at S$31.2 billion, with S$5 billion expected to be delivered in 2H2025.
The company’s pipeline is anchored by new contract wins in 2Q2025 with S$1.5 billion from its CA segment, S$1.5 billion from its DPS segment, and S$1.7 billion from its USS segment.
Recently, the company secured contracts for the new Thomson-East Coast Line Extension (comprising four stations), while also forming new partnerships with NHG Health in Singapore and Solutions by STC in Saudi Arabia to deliver digital solutions.
Risks and challenges
Despite its strengths, investors should be aware of several risks such as the company’s heavy exposure to government defence budgets, which can be cyclical.
Weakening global economic conditions could also pressure the group’s CA segment.
Finally, an increase in input costs due to supply chain disruption and labour shortage could cut into profits.
The company is also heavily leveraged, with a debt-to-equity ratio of 1.81 times and net debt of S$5.2 billion, though it has been actively reducing its borrowings, supported by S$450 million in recent divestments.
STE declared an interim dividend of S$0.08 per share for 1H2025 unchanged from 1H2024, representing an annualised dividend yield of around 2% based on its closing share price of S$7.92 last Friday.
Operating cash flow of S$760.9 million for 1H2025 translates to a sustainable payout ratio of about 36.9%.
Get Smart: What This Means for Investors
ST Engineering’s fundamentals remain robust, supported by the group’s diversified business segments.
The conglomerate’s proven ability to deliver solid, profitable growth across multiple segments has led to its recent surge in price, resulting in a stretched valuation of around 29 times its estimated 2025 earnings.
The sustainability of its dividend provides reassurance for long-term holders.
Investors should monitor contract momentum and aerospace demand as key signals for whether the stock can maintain its recent momentum.
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Disclosure: Wesley does not own shares in any of the companies mentioned.
