• Reiterate BUY with SGD5.20 TP (15% upside), 4% yield. ST Engineering has signed a strategic collaboration agreement with Kazakhstan Paramount Engineering (KPE) to set up a production capability in Kazakhstan for a new 8x8 amphibious multi-purpose armoured vehicle. Although the contract value was not disclosed, it is a strategic win for STE's international defence business strategy, as it marks the group's entry into a new market in Central Asia. We remain positive on STE's ability to deliver steady and defensive dividends along with a 15% profit CAGR in 2023-2026.
• Details of the partnership. The partnership will result in the setting up of a production capability in Kazakhstan for a new 8x8 amphibious multi-purpose armoured vehicle, which will be based on STE's Terrex Infantry Fighting Vehicle. The new vehicle will be manufactured at KPE's production facility in Kazakhstan starting next year. As per KPE's website, it is the largest company in Central Asia producing advanced armoured wheeled vehicles. The agreement is the first significant international land platform contract in recent years for STE's Land Systems unit, and lines up well with its international defence business strategy of pursuing growth through localisation, in-country operations support, and licensing with industry partners. Given the proven capabilities of STE's armoured vehicles, the agreement should not only translate into revenues from licensing and sale of components, but also open doors for more collaboration on multiple projects.
• Still upbeat on the outlook. Our expectation of strong profit growth in 2024-2026 is supported by Commercial Aerospace (CA), STE's second-largest business segment by revenue. Growth in the CA segment will be aided by continued strong demand for aviation MRO work. To meet this demand, STE is ramping up its hangar capacity. Although at a slower pace, STE should continue to see the deliveries of its passenger-to-freighter (PTF) aircraft translating into an improvement in margins. Although we have built in expectations of a gradual margin recovery for the Urban Solutions & Satcom (USS) business segment, in terms of EBIT CAGR, USS should see the fastest growth in 2023-2026F, aided by a turnaround in the Satcom business. Sustained delivery of defence contracts should support growth for the Defence & Public Security (DFS) business segment.
• Accumulate on recent share price weakness. The stock has delivered 17% returns YTD, and we see the recent share price weakness as an opportunity for investors to accumulate, as we expect STE to deliver even stronger profit growth in 2025. Our TP includes a 4% ESG premium over the fair value, given STE's 3.3 ESG score vs the 3.1 country median.

Source: RHB Securities Research - 11 Dec 2024