Company Review - ST Engineering

ST Engineering (SGX:S63) is a global technology, defense and engineering group with roots tracing back to Chartered Industries of Singapore established in 1967. Established back then to provide manufacturing services for ammunition, ST Engineering has evolved to become a group that has businesses in a diverse range of sectors.

In this post, I'll be going through the different segments, their performance and my thoughts on the company.

Pre and Post-Restructuring

From 2021, ST Engineering will organize it's segments into three broad umbrellas, each with it's own sub-segments detailed below. The commercial segments, including aerospace and urban solutions/satellite communications make up roughly 50% of the group's revenue. This is set to increase, as these particular segments were hit hard by COVID-19 compared to the more resilient defence industry.

Prior to this, the group was structured with 4 main pillars: Aerospace, Land Systems, Electronics and Marine. As you can see, the restructuring isn't very straightforward, with some splitting and merging here and there.

For the rest of the post, I will be reporting based off their old framework, as there hasn't been much new data published with the newly proposed framework. I don't think it's too big of an issue, as readers can still understand the general workings and health of the company either way.

Segments Breakdown

Here's an overview of the business segments. ST Engineering is a big company, and it'll be impossible to list down everything that they do, so this list will give you a rough idea of what each segment entails.

Aerospace largely consists of the following products and services:

• Maintenance, Repairs and Operation (MRO), Commercial and Defence
• Chartered Flights, Defence
• Aerostructures & Systems (Nacelle, Cabin Interiors, Conversions etc)
• Aviation Asset Management (Leasing)

Electronics largely consists of:

• Digital Systems & Cyber (Mission Software, Cybersecurity, Training/Simulation Systems etc)
• Urban Solutions (Smart Mobility/Utilities/Infrastructure, Autonomous Solutions)
• Satellite Communications (Ground-based)

Land Systems largely consists of:

• Land Defence Systems 
• Munitions and Weapons
• Specialty vehicles and MRO (eg. 3-door double decker bus)
• Urban Solutions (Smart Mobility/Utilities/Infrastructure, Autonomous Solutions)

Marine largely consists of:

• Shipbuilding
• Ship and Rig Repair

Instead of breaking it down by business segment, we can also look at how much of the revenue comes from commercial versus defence projects. Commercial projects brought in $4.6b in revenue, compared to $2.6b for defence work.

Lastly, we can also break the FY20 revenue down by geography. We can see that Asia and U.S. bring in more than 75% of the revenue last year. 

Segment Performance

For the Aerospace and Electronics segments which provides the bulk of ST Engineering's business, net profit largely mirrors the changes in revenue. 

Aerospace's net profit margin is low, and has been steadily declining over the last 5 years from 9.5% to 7.1%. On the other hand, Electronics managed to maintain a relatively steady margin of 8% to 9% range over the last 5 years.

Land Systems, which is the second smallest segment by FY20 revenue, recorded a generally increasing net profit trend over the years, with the most recent net profit margin of 7.2% being the highest in recent years.

The Marine segment's net profit has been unsteady at best in recent years, with net profit margin deteriorating from 8% in 2016 to 4% in 2020. 

Overall, it is clear that Electronics and Land Systems remain relatively unscathed, due to the relatively defensive and stable "tech" and defence sectors. 

On the other hand, Aerospace has been hit hard by the pandemic, while Marine has yet to fully recover from the sluggish shipbuilding and rig environment.

Group Financials

On the income side, both revenue and profit metrics are on a slight uptrend, with a recent drop in FY20 due to the pandemic. 

All financial indicators reported in the annual report have been stable and perhaps on a slight uptrend over the past 5 years. This is not surprising, as the Aerospace and Electronics segments reported increasing profits from 2016-2019, partially offset by the volatile smaller segments.

In 2020, most metrics deteriorated, mostly attributable to the pandemic.

Interest coverage ratio decreased from 15.7x in FY19 to 11.2x in FY20.

DPU remained flat at 15.0 cents, and dividend cover stands roughly unchanged at 1.1x. 

It's important to note that the results reported above included roughly $350 million in government support/grants. This will be reduced in FY21 by an estimated $250 million, and ST Engineering hopes to cover the remainder by productivity and manpower cost savings, with the remaining relying on gradual business recovery from the impact of the pandemic.

My Thoughts

When I think of ST Engineering, the first two things that come to mind is "Defensive" (haha) and "Diverse". As an established engineering solutions company in Singapore, it has a pretty decent moat, especially when it comes to local defence and public needs. While it is not as flashy as tech companies such as Google, Facebook or Microsoft, the engineering expertise and history will be hard to overlook.

On the other hand, ST Engineering will have to navigate and adapt to COVID and other long term global trends over the next few years. Even with it's innovative solutions and responses, it remains to be seen whether they can fully recover from these issues, which are currently "hidden" by government support and subsidies. 

At a unit price of roughly $3.9, this translates to a pretty stable 3.8%. If you're happy with the yield, I think this would be a decent pick. However, looking at the trend over the years, I would not count on any dividend growth/increases anytime soon. 

I hope you found this post informative! 

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InvestingNugget

Disclaimer:

I am not a shareholder of ST Engineering at the point of writing. This post does not amount to any formal investment advice.