Singapore Technologies Engineering (ST Engineering), the global technology, defence and engineering company, is riding on an upward trajectory for the year, with a near-record $27.5 billion order book, improving financials and strategic acquisitions.
In its business update for 9MFY2023 ended Sept 30, 2023, the company reported revenue of $7.3 billion, 12% higher y-o-y from $6.5 billion in 9MFY2022. Notably, its commercial aerospace segment saw a 30% y-o-y growth in revenue to $2.83 billion, while its urban solutions and satcom segment (USS) recorded 13% y-o-y growth to $1.36 billion.
On the other hand, its other key segement, defence and public security, reported revenue of $3.09 billion for 9MFY2023, down 1% y-o-y. ST Engineering attributes the positive growth momentum to its strategic initiatives. These include efficient cost management like the 20% reduction in headcount of its USS segment’s satcom business portfolio in 1HFY2023, which should reduce costs by $30 million to $60 million over the next five years.
MRO business revving up
It is also betting on the recovery and longer-term growth of its key aircraft maintenance, repair and overhaul (MRO) business. On Sept 22, 2023, the company held the ground-breaking of its new 84,000 sq m (about 904,200 sq ft) facility at Changi Creek, located at the northern end of Changi Airport’s runway.
Once ready, the facility will have four hangar bays, with the first ready in mid-2025 and the remaining three primed for service by 2026. Once fully operational, the Changi Creek facility will provide an additional 1.3 million man-hours annually, roughly equivalent to 10% of ST Engineering’s existing global airframe MRO capacity.
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According to a 4Q2023 outlook by DBS’s CIO office a few days later, channel checks indicate that the MRO market is becoming increasingly tight due to the post-pandemic surge of global air passenger activity. “While airlines still have a backlog of deferred maintenance to clear, we anticipate that MRO operators will experience increased demand over the next few years due to widespread technical issues with new generation engines, as well as prolonged
OEM (original equipment manufacturer) delivery delays that have prompted airlines to postpone the retirement of older aircraft,” says DBS.
With the announcement of the Changi Creek facility, ST Engineering also quickly announced related MRO contract wins from two customers, Indonesia’s Lion Air Group and Japan Airlines, and a multi-year contract to provide Japan Airlines with component maintenance-by-the-hour and othe related services. The company also entered into a collaboration agreement on Sept 27, 2023, with Quickstep Holdings, Australia’s largest independent aerospace engineering company, to establish a regional component pool in Australia, supporting both Boeing and Airbus aircraft.
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The company has also been winnin its fair share of military contracts — afte all, this was how ST Engineering got started decades ago. Under the company’s DP segment, an 18-month service support contract was signed to provide naval MRO fotwo patrol vessels that currently belong to the Royal Brunei Navy. On Dec 14, 2023 another contract was announced with Singapore’s Ministry of Defence to upgrade the Formidable-class frigates for the Republic of Singapore Navy
The frigates’ marine an electrical systems will be upgraded progressively, with the first upgrading expected to be completed in 2028
This contract follows an earlier contract given by Singapore to build a new fleet of six so-called multi-role combat vessels estimated by some analysts to be worth $1.8 billion
Beyond this, ST Engineering has also won a contract to design, build and take the lead for system integration and overall project management of Abu Dhabi’s first multimodal Intelligent Transportation Central Platform over 31⁄2 years until 2027
Also, on Dec 13, ST Engineering announced its intention to fully acquire cryptography firm D’Crypt for an initial consideration o $67 million. In addition to the initial consideration, the deal includes an earn-out consideration of $5 million if certain earning targets are met. For the 1HFY2023 ende June 2023, D’Crypt’s unaudited book value and net tangible assets stood at aroun $48.1 million and $46.1 million, respectively.
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There will also be integration expenses of about $2.7 million, which will be spread over three years. ST Engineering expects to complete the transaction in 1QFY2024
Regarding the acquisition, RHB Bank Singapore analyst Shekhar Jaiswal write in his Dec 15, 2023 note: “We view the acquisition positively as it further strengthen ST Engineering’s cyber business, which is a trusted provider of end-to-end IT and operating technology cybersecurity solution for critical infrastructure and high-security enterprises.”
‘Compelling growth story’
Analysts from DBS Group Research hav raised their target price for the company following the most recent 3QFY2023 earnings as they see the company as no longer just a “defensive stalwart” but also a “compelling growth story”.
In their Nov 14 note, Jason Sum and Suvro Sarkar cite moves such as the Transcor acquisition plus the organic investments into future growth areas as reasons for their view.
For one, Transcore will be earnings-accretive in the second year following the acquisition, as more projects are won.
“These proactive steps position ST Engineering to achieve mid-single-digit revenu growth over the long haul, in our view,” the analysts state, as they keep their “buy” call and raise their target price from $4.20 t $4.50. They project earnings growth of between 15% and 20% for the coming year versus just 3%–5% seen for the current FY2023. A potential increase in its dividends— which is now at four cents per quarter— could also catalyse a re-rating, the DBS analysts say.
Over the past three years, ST Engineering’s share price has traded within a relatively narrow range, reaching a low of $3.19 on Oct 17, 2022, and a high of $4.14 on March 28, 2022.
According to consensus calls, ST Engineering has some upside from the current level of $3.80 as of early February. According to Bloomberg data, as of Feb 1, thereare 12 “buy” calls, with Lorraine Tan from Morningstar the most bullish with her target price of $4.57. Citi Research’s Jame Osman is the most bearish with his sole “neutral” call and $3.76 target price.
