Analysts mixed on ST Engineering amid impairment from iDirect; CGS International upgrades to ‘add’
Increasing defence contract wins of the group appeal to certain analysts
[SINGAPORE] Analysts are mixed on ST Engineering – in the wake of the non-cash impairment of S$667 million incurred by the group on its satellite communications (satcom) subsidiary iDirect.
This impairment, however, was offset by gains from the group’s divestments of LeeBoy, telco provider SPTel and CityCab of S$258 million, noted the analysts.
CGS International analysts Lim Siew Khee and Meghana Kande are optimistic, raising their call on ST Engineering to “add” from “hold” in their Thursday (Nov 13) report.
“We are positive that ST Engineering is preparing a way to explore strategic options for its loss-making iDirect, which was one of our previous key catalysts,” they wrote. The target price on the group was raised to S$9.50 from S$8.70 by Lim and Kande as well.
For the first nine months of FY2025, iDirect’s revenue was down 9 per cent year on year, and earnings before interest, taxes, depreciation and amortisation (Ebitda) were down 22 per cent on the year.
The CGS International analysts noted that the rationale for the impairment was due to the satcom unit’s deteriorating outlook, slower adoption of its Intuition platform, industry disruption, and slower-than-expected customer orders.
“ST Engineering recorded around S$50 million per annum in amortisation savings from the impairment,” they said, reiterating how there are “ongoing active discussions” on options for iDirect. “We believe it includes divestment and expect it to be finalised over the next three to six months.”
Morningstar analyst Lorraine Tan had a more muted response to the state of iDirect, while keeping her fair value estimate of ST Engineering at S$8.10.
“While the sizeable impairment charge for its satcom business is disappointing, it’s not entirely unexpected,” she wrote in her Wednesday report. “Of narrow-moat ST Engineering’s businesses, we have noted that this activity does not enjoy a moat and has struggled with market share losses since 2021.”
Considering how ST Engineering has invested in its new Intuition platform for its satcom business, Tan expects the group to retain iDirect for the foreseeable future.
She added that, given the declining market for iDirect’s solutions as its client base consolidates, it is still hard to see some positivity for the business over the longer term.
Thus, the Morningstar analyst currently forecasts stagnant revenue and continued losses to linger for the group.
“With growth in (the group’s) other core activities, iDirect’s losses are fairly small – but (they are) nonetheless destroying value for the group. The hope is that the excess satellite capacity is absorbed, allowing iDirect’s clients to consider further investment,” she wrote on Wednesday.
She acknowledged that the write-down of assets in ST Engineering’s satcom business will save around S$50 million in depreciation and amortisation, which should be reflected in improving operating profit at its urban solutions and satcom segment from 2026.
The CGS International analysts believe that a full divestment of iDirect could see the urban solutions and satcom division’s Ebit margin recover to more than 5 per cent by FY2027 forward, with Ebit profit savings of more than S$89 million. This is considering the extent of iDirect’s revenue decline in the recent nine-month period.
Positive earnings growth, defence contract wins
The aerospace engineering company on Wednesday posted a 9 per cent year on year rise in revenue to S$9.1 billion for the nine months ended Sep 30. This was mainly due to strong performances across all its three business segments, said the group.
It also proposed a special dividend of S$0.05 per share to shareholders, in view of the cash proceeds from recent divestments.
Morningstar’s Tan said that this would bring the 2025 total dividend per share to S$0.23.
“This implies a 2025 dividend yield of 2.8 per cent based on our fair value estimate,” she noted. “Following its share-price rise this year, ST Engineering no longer trades at its historical dividend yield range of 4 to 5 per cent.”
She added that ST Engineering’s cumulative nine-month group revenue is in line with her estimate, and that the group continues to add to its order book, which now stands at S$32.6 billion.
“Given the decent underlying revenue performance of its other key businesses, we expect the market to shrug off the impairment charge,” Tan said.
The analysts from CGS International pointed out that with the rise in the group’s defence contract wins, up 84 per cent year on year at S$6.6 billion, international defence orders for 9M FY2025 exceeded that of FY2024.
They noted that ST Engineering is “optimistic” about potential contracts for land platform Bronco and Terrex 8x8 infantry-fighting vehicles in Italy, Finland, Austria and the Middle East in the near term.
“(The company) also said that there were strong inquiries for naval shipbuilding jobs from the Middle East, East Europe and Asia... (and that it is) also in negotiations for maintenance, repair and overhaul (MRO) work (new services) for land platforms in the Middle East,” Lim and Kande explained.
That said, Morningstar’s Tan noted that the group’s management expects the aircraft feedstock supply that is needed to boost its passenger-to-freight conversions to remain tight until 2027.
“While aircraft deliveries by Airbus and Boeing are normalising, airlines are likely to want to weigh the demand outlook before releasing their older fleet,” she said.
Demand for engine MRO activities is strong, however, and makes up for the “slower conversion activity”, Tan noted.
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