For years, the Singapore Airshow, despite its name, has been the ideal setting for Singapore Technologies Engineering S63 (ST Engineering) to show off its new range of products beyond the aerospace industry.
At the most recent edition of the airshow held between Feb 20 and Feb 25, the The Terrex s5, the latest variant of the 8x8 armoured carrier, featuring advanced electronics and a hybrid engine option (for creeping up on unsuspecting foes), took centre stage within the 2,000 sqm space occupied by the company.
Meanwhile, the curious-looking AirFish Wing-in-Ground (WiG) craft, which can fly just above the water at 90 knots, is designed to be a faster and smoother alternative to ferries. And, of course, there is the NextGen Singapore Assault Rifle, positioned as a potential replacement for the SAR21, the standard issue firearm of the country’s military for over two decades.
“Our showcase exemplifies our group’s collective engineering capabilities and domain expertise, highlighting our ability to deliver comprehensive solutions that create meaningful impact,” says Ravinder Singh, group chief operating officer of ST Engineering. In an earlier chapter of his career as Singapore’s former chief of army, Singh would have been using ST Engineering’s products instead of marketing them.
On Feb 21, the second day of the airshow, Turkish-based Eurasia Mobility Solutions signed a letter of intent for up to 10 AirFish to be delivered in 2025 to serve the country’s tourism and private transportation sectors.
Given the international nature of the defence industry and the thousands of overseas trade visitors, ST Engineering has interested many of them, especially those from Europe and the Middle East in looking closely at what is available.
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Decades after ST Engineering diversified into commercial business, its original business of selling arms remains a core business, generating both quantum and growth momentum.
Of the $3.1 billion in new orders won by all three of ST Engineering’s business segments in the most recent 4QFY2023 ended December 2023, the defence and public security (DPS) segment recorded the largest quantum of $1.5 billion.
The new contracts consisted of cloud, AI-enabled mission-critical command and control systems and cybersecurity functions for its digital systems. They also included new contracts for 40mm ammunition, ship repair, and maintenance services, including the mid-life upgrade of the Republic of Singapore Navy’s Formidable-class frigates.
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Singh, who wears another hat as president of the DPS segment on top of his group COO role, says ST Engineering invests continuously to build up capabilities in new technologies, especially in AI, cloud and cybersecurity, to win orders in these new growth areas.
“We also believe that the market demand we saw during the airshow is there for digital systems and cyber businesses, so we expect that growth,” says Singh, speaking at the company’s FY2023 results briefing on Feb 29.
In 2HFY2023, the DPS segment’s revenue held steady at $2.13 billion versus 2HFY2022.
However, ebit grew 40% y-o-y to $267 million in the same period, thanks to a more profitable mix of products sold. For FY2023, DPS generated a total revenue of $4.3 billion or 42% of ST Engineering’s total for the year. Ebit was up 40% over FY2022 to $567.4 million.
“I think DPS had a very good year,” says the group president and CEO Vincent Chong.
On the other hand, the commercial aerospace (CA) segment is recovering steadily from the pandemic. In 2HFY2023, it generated revenue of $2.05 billion, up 29% y-o-y, bringing the total for FY2023 to $3.9 billion, or 39% of the company’s total. Ebit for 2HFY2023 jumped 35% y-o-y to $159.7 million while it was up 12% y-o-y to $337.2 million for FY2023.
Notably, revenue from CA’s maintenance, repair and overhaul (MRO) sub-segment jumped 41% y-o-y to $1.96 billion, in line with the recovery of the global aviation industry. Chong is happy to report that CA is “really climbing up” and that “we will see more momentum”.
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In 4QFY2023, the CA segment won contracts worth $1 billion, including heavy maintenance contracts with Chinese airlines for CFM56-7B engines, a heavy airframe maintenance contract for an American airline and a landing gear overhaul contract for an Oceania airline.
To expand its addressable market, ST Engineering has equipped itself to work on additional aircraft types such as the A320neo, the 737 MAX and the A350, says Jeffrey Lam, president of CA. “So beyond just keeping up, we increase the activity level for investments in the future, for retooling, training, and so on. So really, we look at CA as a growth business,” he adds.
More projects to share
In terms of revenue contribution, the urban solutions and satellite communications (USS) division may be the smallest among the three, at 19%. However, this is also where the company has something to cheer about.
TransCore, the US traffic management business acquired in March 2022 for US$2.7 billion, has turned earnings-accretive three months ahead of schedule.
“We are very heartened by the pipeline of projects, both in our core and also in synergistic ones, as well as our ability to put synthesiser solutions together within the group to address new market opportunities. There will be more to come, and we have more projects to share,” says Chong.
In FY2023, USS revenue grew by 10% y-o-y to $1.94 billion but ebit was down 66% y-o-y to $10 million, no thanks to continuing challenges faced by Satcom as well as divestment loss incurred from a satellite antenna venture. Chong, calling Satcom a “growth sector”, remains optimistic about the prospects of this business and that ST Engineering will soon unveil a next-generation platform. “This all underscores the growth potential in this particular industry.”
Meanwhile, thanks to the urban solutions part of USS, in 4QFY2023, USS secured an order book of $645 million. This consists of a mix of platform screen door solutions and electronic tolling systems contracts across Canada, Australia, India and the US. Satcom also secured ground infrastructure contracts in the government, enterprise and cellular backhaul segments across Asia, the US, the Middle East and Latin America.
All in, ST Engineering’s FY2023 earnings increased by 9.6% y-o-y to $586.5 million on the back of 11.8% y-o-y growth in revenue to $10.1 billion. The company will maintain its next quarterly dividend at four cents, bringing the FY2023 total to 16 cents, representing a payout ratio of 85%. Its order book as at the end of FY2023 was $27.4 billion, just a shade lower versus the all-time high of $27.7 billion two quarters ago.
Revised target prices
Analysts like what they see, as they raise their target prices while keeping buy or equivalent calls. PhillipCapital’s Peggy Mak was the exception. She kept her already bullish target price of $4.50 but downgraded her call from “buy” to “accumulate”, citing ST Engineering’s share price that has gained in recent weeks.
Roy Chen of UOB Kay Hian, citing the company’s strong order book and guidance of higher order book revenue conversion, expects ST Engineering’s revenue to grow 8.9% to reach $11 billion in the current FY2024, which will be two years ahead of the company’s target of FY2026.
Furthermore, Chen expects the company to extract better operating leverage as it ramps up the commercial aerospace segment, thereby lifting margins. Higher contributions from TransCore will also help drive ST Engineering’s core net profit to grow at a CAGR of 10.2% between FY2023 and FY2026.
While keeping his “buy” call, Chen has a raised target price of $4.50 from $4.20 previously.
Meanwhile, OCBC Investment Research is “encouraged” to see the company driving better operational leverage to gain better margins. OCBC, which raised its target price to $4.60 from $4.45, has also given the thumbs-up to how ST Engineering is willing to rationalise underperforming assets and is actively recycling capital to rein in gearing levels.
Jason Sum and Suvro Sarkar of DBS Group Research, in their March 1 report, reiterate their view that ST Engineering is no longer the traditional defensive stalwart with stable dividends but limited growth. Since 2018, it has made key acquisitions such as TransCore but has also intensified investments in its organic capabilities to capture future growth areas better. “We believe these proactive steps position ST Engineering to achieve mid-to-high single-digit revenue growth over the long haul,” the DBS analysts say.
“While ST Engineering’s share price has been trending sideways for some time, we believe it is on the cusp of a breakout as the company shifts back into growth mode starting,” say Sum and Sarkar, as they raise their target price to $4.80 from $4.50.
