Should You Invest In Singapore Technologies Engineering Limited Now?

Singapore Technologies Engineering Limited (ST Engineering) came into being in 1997, via mergers of various companies involved in the shipbuilding, electronics engineering, automotive and aerospace sector. Some of these entities even went as far back as 1967. Over five decades, it had evolved into a diversified, globalised technology, defense, and engineering outfit today.

As a major supplier and service provider to Singapore’s Defence Ministry and Armed Forces, not surprisingly, it is majorly held by Temasek Holdings. It is also a constituent of the Straits Times Index.

Let’s take a look at seven key pieces of information that you need to know about this engineering conglomerate.

Business Segments

ST Engineering business operations are classified into 4 segments.

Aerospace – provide Maintain, Repair and Overhaul (MRO) services to commercial airlines, airfreight companies and military fleet owners. Also offer engineering, aviation materials and asset management services. ST Engineering is the world’s largest MRO provider going by a number of man-hours achieve in maintenance output.

Electronics – deliver innovative advanced electronics and Info Communication Technologies solutions for sectors such as e-government, intelligent transportation, satellite communications and cybersecurity.

Land Systems – develop and manufacture specialised land vehicles and land system for defense, homeland security and niche commercial operations with stringent technical requirements.

Marine – customized shipbuilding, repair and conversion services.

All in all, it’s clear that ST Engineering is an integrated engineering services provider that applies its engineering expertise in a wide range of industries.

Global Presence

ST Engineering is a global entity with more than 100 subsidiaries, joint ventures and associate companies found in 44 cities across 22 countries.

It has a strong presence in the United States with its key subsidiary, Vision Technologies System Inc that was set up in 2000. China is another important market where ST Engineering offices can be found in major cities such as Beijing, Shanghai, Guangzhou and Hong Kong.

The map below shows its globalised operations that cover all the major continents.

Source: ST Engineering Corporate Website

Financials

ST Engineering 2013 – 2017 Revenue and Profit before Tax. Source: 2017 Annual Report

From the year 2013 to 2017, ST Engineering revenue was stable and maintained within a small range of $6.34 billion to $6.68 billion, equivalent to a fluctuation of approximately 5%.

However, its Profit before Tax (PBT) had been on a downward trend, fell from $729.7 million in 2013 to $623.3 million in 2017, albeit with a small increase last year.

If we look into the results breakdown, one would notice that Marine and Land Systems segments have been performing poorly past 5 years, contributing to the drop in PBT. Noticeably, Land Systems revenue of $1.24 billion in 2017 was 20% lower than 2013, while Marine showed an even larger drop of 48.4% in revenue compared to 2013.

Fortunately, Aerospace and Electronics segment showed steady growth, with their revenue being 22.1% and 27.8% higher than 2013 respectively. Their PBT managed to pick up the slack over the same 5-year period, as Electronics showed 24.6% growth in PBT while Aerospace maintained its PBT at $317.8 million.

ST Engineering 2013 – 2017 Revenue and Profit Breakdown. Source: 2017 Annual Report

If we look closer to the latest results, a similar trend was observed as Aerospace and Electronics first half 2018 revenue expanded by 10% and 5% each, while Land Systems and Marine first half 2018 revenue shrank by 4% and 13% respectively.

Balance Sheet

As at 30 Jun 2018, ST Engineering has total assets of $8.06 billion and total liabilities of $5.63 billion. It’s Debt to Assets ratio of 0.698, which means that out of every dollar of its assets, 69.8 cents is funded by debt. This is a slight increase from 30 Jun 2017 when the Debt to Assets ratio of 0.688.

Dividends Record

ST Engineering is favoured as a dividend stock, with its generous dividend payout. Indeed, it shows a healthy dividends track record, with a 15 cents dividend that has been maintained in the past 5 years.

With a 5-year share price range of $2.69 and $4.20, this gives ST Engineering a dividend yield that hovers between 3.57% and 5.57%.

Business Outlook

ST Engineering order book amounts to $13.4 billion as at 30 Jun 2018, underpinned by the strong growth in Aerospace and Electronics segments. Overall, the group has identified growth areas in defence exports and smart city projects.

More specifically, it seeks to secure key defence and commercial programmes locally and overseas, and accelerate the deployment of an autonomous vehicle in Singapore under its Electronics segment. Under Electronics, it intends to deliver smart mobility, satellite communications, and software system contracts related to smart city drive. Lastly, Aerospace would also see strong growth from the passenger-to-freight conversion, as it has secured a launch customer for a fleet of A320 jets.

Valuations

ST Engineering share price closed at $3.29 on 22 Aug 18. With a 2017 Earnings per Share of $0.1643, its Price Earning Ratio is 20.02. Dividend yield would be a comfortable 4.5%.

Conclusion
ST Engineering seems to fit the bill as an established, stable engineering conglomerate that dishes out regular dividends, see from its consistent revenue and diversified operations with segments that outperform and negating the effect of bad-performing segments.

However, one needs to monitor its PBT that has been sliding from 2013 – 2016 and had just recently expanded in 2017. A sustained growth in PBT here on bodes well for its dividend paying ability.

The bottom line is that with a defensive, diversified operations spread out globally, ST Engineering is unlikely to see big volatility in its earnings and in turn, share price. So an individual investor has to make a judgment call on the price level and a dividend yield that is sufficient to induce them to make a purchase.

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CS Jacky

CS Jacky is a Remisier and Financial Adviser with Phillip Securities Pte Ltd. Graduated with a Bachelor in Business Administration (Finance), he has been investing in the stock market since 2010. He identifies companies with good prospect trading at a low valuation using a unique blend of fundamental, technical, and portfolio analysis. He also holds REITs and dividend paying shares. He holds regular seminar to share about market updates, investment insights of specific stocks in his watch list, and overall wealth management for retail investors. He is the owner-blogger of 'CS Jacky - 360 Wealth Management' and a guest writer for Value Invest Asia.

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