Investments In MRO Capacities And International Expansion Will Strengthen Future Competitiveness

Key Takeaways

• Strong order book and strategic investments enhance revenue visibility, operational capabilities, and margins, supporting long-term growth.
  
• Defense segment growth driven by geopolitical tensions and international expansions boost revenue and competitiveness.
  
• Geopolitical tensions boost defense revenue, while supply chain issues and U.S. tariffs challenge aerospace, and Satcom transformation poses risks to profitability and dividends.

Catalysts

Operates as a technology, defence, and engineering company worldwide.

• The company has a robust order book of $28.5 billion, providing significant revenue visibility with $8.8 billion expected for delivery in 2025, suggesting strong future revenue prospects.
  
• Strategic investments in new airframe MRO capacities and other facilities are expected to enhance operational capabilities and efficiency, which could lead to improved margins and earnings.
  
• The company’s focus on cost management and productivity enhancements has resulted in the lowest operation expenses as a percentage of revenue in recent years, potentially boosting net margins.
  
• The Defense and Public Security segment is experiencing robust growth partly due to heightened geopolitical tensions, which is expected to continue contributing significantly to revenue and EBIT.
  
• The company’s ongoing expansion into international markets, such as 155 mm ammunition export to Europe and partnerships in Kazakhstan, is likely to support revenue growth and improve global market competitiveness.

Singapore Technologies Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Singapore Technologies Engineering's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 7.4% in 3 years time.
• Analysts expect earnings to reach SGD 1.1 billion (and earnings per share of SGD 0.34) by about March 2028, up from SGD 702.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, down from 29.3x today. This future PE is lower than the current PE for the SG Aerospace & Defense industry at 32.2x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.46%, as per the Simply Wall St company report.

Singapore Technologies Engineering Future Earnings Per Share Growth

Risks

• The success of ST Engineering's defense segment is partly due to geopolitical tensions and conflicts, which are unpredictable and could stabilize or shift, potentially impacting future revenue and net margins from defense contracts.
  
• The group's significant reliance on the commercial aerospace segment, with 39% of revenue coming from this area, could be affected by ongoing supply chain issues, such as shortages of aircraft feedstock for PTF work, impacting revenue growth and net margins.
  
• The transformation of the Satcom business, while showing early signs of recovery, is not yet complete, posing a risk to consistent revenue contributions and overall profitability if recovery efforts are insufficient or delayed.
  
• The potential impact of U.S. tariffs on ST Engineering's commercial aerospace operations could increase costs or disrupt operations, affecting net profit margins negatively if not mitigated through strategic measures.
  
• Future dividend payouts are dependent on consistent profit growth and efficient capital management. If growth targets are not met or if there are large, unforeseen expenditures, dividend payments could be affected, reducing returns for shareholders.

Valuation

• The analysts have a consensus price target of SGD6.917 for Singapore Technologies Engineering based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD8.0, and the most bearish reporting a price target of just SGD5.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SGD14.3 billion, earnings will come to SGD1.1 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of SGD6.62, the analyst price target of SGD6.92 is 4.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.