Can Singapore Technologies Engineering Ltd Beat The Market From Here?

Over the past five plus years, global engineering stalwart Singapore Technologies Engineering Ltd (SGX:S63) or ST Engineering has been a steady source of dividends.

For the financial year ended 2009 (FY2009), the company paid out a dividend of S$0.1328. This rose slightly to S$0.15 for the financial year ended 2013 (FY2013). Collectively, the company had paid out a little over S$0.79 in dividends since FY2009. For more information, My colleague Ser Jing has also looked into its dividend and cashflow track record.

The capital gains for ST Engineering, though, fell slightly behind the Straits Times Index (SGX:^STI). From 1 January 2009 to its closing price yesterday, it delivered capital gains of around 49%. By comparison, the total returns of the STI ETF (SGX:ES3), an exchange traded fund that tracks Singapore’s market barometer, was a little under 79% for the same duration.

When dividends are reinvested, the company returns a total of 102% over the five plus year period.

Show me the money!

While the returns from ST Engineering has been above average at best — as Foolish investors, we should look under the hood to understand what the business drivers for the future.

ST engineering graph 1










Source: Company earnings presentation

The engineering group’s revenue is mainly derived from the aerospace, electronics, land systems and marine sectors. For the aerospace sector, ST Aerospace is the leading brand name in the global maintenance, repair, and overhaul MRO industry. It provides about 31% of the group’s revenue for FY2013. The next largest sector would be the electronics sector with ST Electronics. It labels itself as the leading information communications technologies (ICT) system provider. The segment coverage includes broadband communications; e-Government & E-Enterprise; as well as Eco-enabling ICT, and encompasses a wide ranges of industries. This electronics segment provided slightly below 25% of FY2013 overall sales.

The land systems sector consists of 22.2% of total sales for the same financial year. ST Kinetics is the mainstay here, providing one of Asia’s leading land systems and speciality vehicles for defence and commercial purposes. Lastly, ST Marine makes up the sales for the marine sector with close to 19% of sales. This segment provides shipbuilding, repair and conversion services for naval and commercial markets.

Among the four sectors, ST Aerospace and ST Electronics appear to be the revenue contributors with steady increases over the past five years. Beyond revenue, we would ideally like to see profit rise together with the revenue increases. For that, we look into the profitability of the business sectors.

ST engineering graph 2










Source: Company earnings presentation

ST Aerospace comes up tops again for net profit among the four. It makes up an outsized 44.6% of the group’s net profit for FY2013. In fact, the aerospace segment’s profit (before tax) margins got better over the past five years, rising from 12% in FY2009 to 15% in FY2013. ST Electronics and ST Marine both provided profits inline with their revenue contribution, but ST Kinetics fell behind with only 15.7% of overall profit.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at the cash and debt development.

ST engineering graph 3










Source: Company earnings report

The balance sheet has gotten healthier as the years progress. As of FY2013, the company has a strong positive net cash position. Investors should note that part of its debt consists of a $500m 10-year bond which was issued in 2009.

Foolish bottom line

As lifelong students of Foolish long term investing, it pays to look under the hood to find clues on where the company’s shares may head to next.

Based on the four major revenue and profit contributors, ST Aerospace and ST Electronics could be where Foolish investors want to keep a lookout for in the future. ST Aerospace in particular has been generating outsized profits and could be the sector which carries the company.

ST Engineering currently trades at a price-to-earnings ratio of 20 and has a dividend yield of 4.4% based on yesterday’s close.

As a last word: Although the focus here is on ST Engineering, Foolish investors who are interested in a pure play for the MRO sector have the option to consider SIA Engineering Company Limited (SGX:S59) as well.

I’ll be doing a deep dive into one of ST Engineering’s business sectors, helmed by ST Electronics tomorrow. So stay tuned!

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.