Singapore Technologies Engineering: A Buy Amid Strong Earnings, Dividend Growth, and Strategic Momentum

Singapore Technologies Engineering (SGX:S63) has emerged as a standout performer in the aerospace and defense industry, driven by a 19.7% year-on-year net profit increase in the first half of 2025. With a robust order book of $31.2 billion and a strategic focus on core businesses, the company is positioning itself for sustained growth. For investors seeking a blend of earnings momentum, dividend resilience, and long-term value creation, ST Engineering presents a compelling case.

Earnings Beat and Operational Strength

In 1H 2025, ST Engineering reported net profit of $402.83 million, up from $336.53 million in the same period last year. Revenue rose 7.2% to $5.915 billion, driven by strong performances in the Commercial Aerospace and Defence & Public Security segments. The Commercial Aerospace segment, despite a 5% revenue increase, faced headwinds from lower PTF (Parts Trading Facility) revenue. However, cost savings and a better margin mix propelled EBIT growth by 18% to $223 million. Meanwhile, the Defence & Public Security segment delivered a 12% revenue rise to $2.65 billion, with EBIT up 13% to $367 million.

The company's $9.1 billion in new contracts during the first half of 2025—split evenly between Q1 and Q2—has bolstered its order book, with $5 billion expected to be delivered in 2025 alone. This revenue visibility, coupled with strategic divestments of non-core assets like the Leeboy construction machinery unit and SPTel joint venture, underscores a disciplined approach to capital allocation.

Dividend Growth and Sustainability

ST Engineering's interim dividend of 4.0 cents per share, to be paid on September 5, 2025, reflects a payout ratio of 69% for 2025. While the current dividend yield of 1.42% lags historical averages (4.47% over 10 years), the company's free cash flow of EUR 791 million (cash payout ratio of 55%) ensures dividend sustainability. The board's focus on balancing shareholder returns with reinvestment in high-growth areas—such as urban solutions and satellite communications—positions the dividend for gradual expansion.

Valuation and Long-Term Prospects

Despite a P/E ratio of 34.59 and a P/B ratio of 8.68—both above the Aerospace & Defense industry averages—ST Engineering's valuation appears justified by its growth trajectory. The company's PEG ratio of 2.19 suggests overvaluation at first glance, but this metric fails to capture the strength of its $31.2 billion order book and recurring revenue streams from long-term contracts.

Moreover, the stock's 90% year-to-date price surge to a record high of $8.96 reflects market confidence in its strategic pivot toward defense and public security, sectors poised for long-term demand amid global geopolitical tensions. While the dividend yield may not attract income-focused investors, the company's ability to generate free cash flow and its disciplined capital structure make it a strong candidate for capital appreciation.

Investment Thesis

ST Engineering's combination of strong earnings growth, sustainable dividends, and strategic clarity makes it an attractive buy for investors with a 3–5 year horizon. The company's focus on high-margin defense contracts, coupled with its exit from non-core businesses, enhances long-term profitability. Additionally, its robust order book provides a buffer against short-term volatility, ensuring consistent revenue streams.

Risks to Consider:
- Valuation Concerns: A P/E of 34.59 is elevated compared to peers, requiring continued earnings growth to justify the premium.
- Currency Fluctuations: A weaker USD could pressure revenue growth, though the company has mitigated forex risks through hedging.

Conclusion:
Singapore Technologies Engineering is a rare blend of operational excellence and strategic foresight. While its valuation metrics may appear stretched, the company's earnings momentum, expanding order book, and disciplined capital allocation create a compelling long-term value proposition. For investors seeking exposure to a resilient aerospace and defense player, ST Engineering offers a balanced mix of growth and income potential.