Being Singapore’s aerospace and defence group, one wonders whether ST Engineering has lost its investment fortress. Revenue has stagnated since FY2012 and net profit plunged from $576.2 million in FY2012 to $484.5 million in FY2016. Due to the declining financial performance, the stock price had also dropped from a high of $4.45 in FY2013 to the current $3.36 level.
Is ST Engineering a value trap or bargain buy now? This article will examine the merits and risks of investing in this government-linked company.
Firstly, as a defence group, ST Engineering enjoys a defensive fortress in Singapore as its Land Systems sector supports the Singapore Armed Forces (SAF) to modernize our fighting forces through major projects like the next-generation Armoured Fighting Vehicle. It also provides engineering solutions for various weapons and ammunition systems. For 3Q2017, commercial sales and defence sales constituted 63% or $1.0b, and 37% or $0.6b respectively of Group revenue.
Apart from defence projects, ST Kinetics also delivers solutions for commercial projects like specialty vehicles. However, the diversification of revenue come with a price as it announced divestment of its entire 60% equity stake in Guizhou Jonyang Kinetics Co., Ltd. (GJK) to GICAM for a cash consideration of RMB200m (approximately S$43m). The management has decided to exit the GJK business, which builds excavators and is in a segment that increasingly requires scale to gain competitive advantage. In 3Q2016, there was $61.1m one-off charge incurred for its Specialty Vehicle business in China.
Land Systems continued to be among the weakest link among the four sectors in 2017. For 9M2017, the revenue was $906 million, a 20% decrease year-on-year. While I can understand that the Marine sector is suffering because of the global oil price slump, there is no justification for the poor showing of the Land Systems. There are some pipeline contracts (road construction equipment) secured and acquisitions made (Aethon) but they are hardly game-changers for the Land Systems. In this regard, I hope that would be better news from this segment in the near future.
Aerospace Sector flying high
As expected, the Aerospace sector remains the champion segment for ST Engineering. For 3Q2017, the Aerospace sector revenue grew 8% to $608m from $563m and its profit before tax was $66.3m compared to $65.2m in last year. For 9M2017, Its Aerospace sector posted comparable revenue of $1.8b and PBT of $223.3m versus $214.5m in 9M2016.
Part of the reason for the success of the aerospace arm of ST Engineering is because it is strategically located in Singapore, one of the world largest aerospace maintenance hub. As such, the company is able to leverage on Singapore’s reputation and garnered a pipeline of maintenance projects from civil and military customers.
Another competitive advantage of ST Aerospace is that it is an aircraft engineering company, unlike Singapore Airlines, which is more focused on airline operations. [The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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