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ST Engineering’s Profit Dips

Ser Jing - ST Engineering First Quarter Results, Unchanged Revenue and Profit (pic) The aptly-named Singapore-based engineering firm Singapore Technologies Engineering (SGX: S63) announced its third quarter earnings yesterday evening and saw its revenue inch upwards while profits slipped.

The company has four main business sectors: Aerospace; Electronics; Land Systems; and Marine.

The first sector provides a spectrum of maintenance and engineering services that include airframe, engine and component maintenance, repair and overhaul among others.

Under its Electronics arm, ST Engineering specialises in the design, development and integration of advanced electronics and communications, such as broadband radio frequency and satellite communication, real-time command and control, modelling and simulation, rail and traffic management etc.

With Land Systems, the company delivers products such as integrated land systems and specialty vehicles for defence, homeland security and commercial applications.

Finally, the Marine sector provides turnkey building, repair and conversion services for a wide spectrum of naval and commercial vessels.

Some basic numbers

For the three months ended 30 Sep 2013, revenue inched up 0.5% year-on-year to S$1.55b while profits dropped 10.3% to S$131m.

Here’s a table that breaks down ST Engineering’s revenue segments for the quarter:

Sector Revenue Year-on-Year Change
Aerospace S$510m 1%
Electronics S$350m 3%
Land Systems S$348m -11%
Marine S$296m 25%
Others S$46m -33%
Total S$1.55b 0.5%

As we can see, the Aerospace and Electronics sectors are just humming along with no big changes.

The Marine sector had a big jump in sales as it saw higher shipbuilding activities from both its local and US operations.

The company’s profits had declined as expenses increased. In particular, finance income had dropped from S$1.27m a year ago to a negative S$3.79m. Elsewhere, the ‘Other’ operating expenses category also went up 9.8% from S$27.5m to S$30.2m.

Operating highlights and the balance sheet

In the quarter, commercial sales made up 63% of the company’s total revenue.

There has recently been a host of contract wins for the company in its Aerospace and Electronics sectors worth S$600m and S$416m respectively. In addition, the Land Systems sector also managed to bag several contracts to provide its 40mm weapon ammunition solutions to customers, which includes the Canadian Armed Forces. The Marine sector hasn’t been idle either, as it “continued to win projects for its ship repair business.”

ST Engineering’s balance sheet has weakened somewhat compared to a year ago, as cash on hand has dropped from S$1.96b to S$1.77b while total debt has increased from S$1.29b to S$1.36b.

What’s next for ST Engineering

As it stands, the company has an order book of S$12.5b, unchanged from the same period last year, and the company commented that “it expects to recognise about S$1.5b out of the [order book] in the remaining months of 2013.”

Tan Pheng Hock, chief executive of ST Engineering, commented on the quarter and beyond:

The [third] quarter saw a pessimistic business sentiment due to speculation of the US Federal Reserve QE tapering, along with a challenging European environment and softening of the China economy.

While these factors have weakened demand in several business areas, the [company] secured new commercial orders and several new contracts from governments around the world… Our strong order book gives us the ability to ride out market volatilities in the future. The diversified competencies across our business sectors put us in a good position to face the uncertain business climate that lies ahead.

Barring unforeseen circumstances, the Group expects to achieve comparable Revenue and PBT [profit before tax] for FY 2013 over FY 2012.”

Over the past five years, the company’s share price returns of 87% have been just a whisker ahead of the Straits Times Index’s (SGX: ^STI) 82% gain.

So, ST Engineering has been a market beater, but not by much. That might not be a real surprise seeing how ST Engineering’s profit growth has not exactly been stellar: from 2007 to 2012, the company’s profits grew by only 14% – or 2.7% a year on average – to S$576m from S$503m.

Based on management’s comments earlier, it seems that the company will likely end 2013 with little or no growth. What can kickstart ST Engineering’s growth? Or is it even possible? Those are some good questions for investors to think about.

Valuations

The market doesn’t seem too happy with ST Engineering’s earnings as its shares opened the day at S$4.15, down by 1.2% from Thursday. At that price, its shares are valued at 23 times trailing earnings and carry a dividend yield of 4% based on last year’s full-year pay-out.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.