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What can Drive Growth for Singapore Technologies Engineering?

Previously, I wrote about global engineering stalwart, Singapore Technologies Engineering Ltd (SGX:S63) or ST Engineering. Today, I would like to look deeper into one of its major business sectors which is helmed by ST Electronics. As a refresher, the business segment 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. It also serves a customer base spanning more than 80 countries.

The electronics segment also provided about 25% of ST Engineering’s FY2013 sales, and has been one of the steady revenue and profit contributors to the conglomerate. As Foolish investors, we should look under the hood to understand what the business drivers for the future.

A closer look

second ST engineering graph 1

 

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

ST Electronics can be divided into three sub-sector groups. The communication and sensor systems group (CSG) is the largest of the trio, contributing more than half of the sector’s revenue for FY2013. At the ST Engineering level, this sub-sector made up almost 13% of overall sales (FY2013). The CSG sub-sector makes devices for surveillance, satellite broadband communications and Very small Aperture Terminal (VSAT) products. It is also the fastest growing of the bunch, expanding 27.5% over the past five financial years.

The second largest group, Software Systems, covers mission critical C4I systems (command, control, communications, computer & intelligence). Lastly, the Large Scale Systems group is mainly to provide repair and maintenance services for the ministry of defense for Singapore.

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.

second ST engineering graph 2

 

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

The CSG group showed equal dominance in terms of profits before tax as well, matching its revenue contribution. In the past two years, the large scale systems group has moved up in terms of profit contribution due to completion of rail projects in Singapore (MRT Downtown line), Chennai, Wuxi, Bangkok and Taipei.

Finally, Foolish investors may also want to look at the regions which the sector derives its revenue from. For this, we look at the geographical revenue distribution.

second ST engineering graph 3

 

 

 

 

 

 

 

 

 

 

Source: Company Earnings Report

Asia comes up tops here with a 78.7% revenue share for FY2013. USA, though, is the growth provider by percentage, with sales more than doubling since five plus years ago.

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.

In this case, the Communications and System Sensors group could be one of the bright lights of this large conglomerate, alongside the Large Scale Systems group. The sub-sector did not give much detail in its forward guidance, but expects it to be higher — barring unforeseen circumstances.

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.

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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.