High order backlog, global ‘defence inflection point’: Analysts positive on ST Engineering’s contract win

[SINGAPORE] Analysts on Thursday (Apr 2) viewed ST Engineering’s latest contract win positively, but at least one flagged a possible de-escalation in Middle East tensions as a reason not to get into the stock right now.

The defence technology player on Wednesday announced a S$600 million six-year subcontract win from Abu Dhabi Ship Building to design and supply the platform systems for eight Kuwaiti navy gunboats.

DBS on Thursday raised its target price for ST Engineering to S$12.40, from S$11 previously, flagging an “improving defence visibility and a higher-quality earnings mix”.

In a Wednesday note, it pointed to an “international defence inflection point emerging alongside already strong aerospace earnings momentum”.

“Commercial aerospace should continue to see strong earnings momentum, driven by extended asset utilisation and tight supply-demand conditions in MRO (maintenance, repair and overhaul), while defence is beginning to scale as international orders come through,” it added.

This is being reflected in ST Engineering’s subcontract win, DBS pointed out, noting also that it brings the company’s “total international defence contracts secured to around S$1.07 billion year-to-date, tracking well ahead of the full-year target of S$1.2 billion”.

CGS International (CGSI), meanwhile, believes ST Engineering “was able to capture a higher value for the latest contract due to the expanded scope”, citing the scope of contract requirements.

“We believe this win reinforces ST Engineering’s growing presence in the Middle East,” it said on Thursday, further noting that the company won its first defence MRO contract – worth S$470 million – for the Qatar Emiri Land Forces in February.

“Take a breather”

Citi analyst Luis Hilado, in a Wednesday note, said that this “establishes a healthy relationship track record that could result in future additional contracts”.

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The brokerage maintained a “neutral” call, but set a lower target price of S$10.65.

The Kuwait win builds on ST Engineering’s existing relationship with Abu Dhabi Ship Building; it previously supported the Middle East company in 2021 with design and equipment for four offshore patrol vessels for the United Arab Emirates Navy.

CGSI downgraded ST Engineering from “add” to “hold”, deeming the stock fairly valued despite viewing its growing Middle East presence positively.

“We recommend investors take a breather amid potential de-escalation in Middle East tensions and rotate into other industrial names with more attractive risk-reward, said CGSI analysts Lim Siew Khee and Meghana Kande.

They added that ST Engineering, which is trading at a 30-times forecast price-to-earnings ratio for 2027, “largely prices in its 16 to 17 per cent earnings growth” for FY2026 and FY2027.

“It also represents a premium over larger defence peers’ 25-times (ratio),” they said, keeping their target price for the company at S$11.05.

Still, the analysts noted that negotiations for the latest win could have been ongoing for an extended period and may not have been linked to the Iran war.

Factors weighing on outlook

DBS analyst Jason Sum projected a 20 per cent compound annual growth rate in core net profit through FY2027.

This trajectory is expected to be fuelled by expanding MRO capacity and faster project execution, alongside margin improvements driven by operating leverage and lower interest costs.

He also noted that rising procurement budgets in Europe and the Middle East, especially for equipment, have “expanded the company’s export runway”, with previous investments in research and development, partnerships and marketing now set to deliver returns.

CGSI, on the other hand, expects order conversion to be uneven, despite an international defence market worth over US$11 billion – a figure that is still backed by a structural shift towards self-sufficiency.

Outside of defence, CGSI expects opportunities for ST Engineering’s urban solutions and satellite communications segment in smart city and infrastructure rebuilding initiatives in the Middle East.

DBS’ Sum echoed the sentiment, stating that “smart-city demand is accelerating”, boosting the company’s growth. He added that its mergers and acquisitions strategy is likely to provide further uplift.

However, CGSI noted that such a boost could be tempered by commercial aerospace headwinds, where “elevated jet fuel costs could lead airlines to defer non-critical MRO spending, potentially moderating near-term order momentum”.