The Motley Fool

The Aerospace Giant Hiding within Singapore Technologies Engineering Ltd

Previously, I wrote about global engineering stalwart, Singapore Technologies Engineering Ltd (SGX:S63) or ST Engineering. Today, I would like to look deeper into its giant aerospace sector which is helmed by ST Aerospace. As a refresher, the business sector labels itself as the leading brand name in the global maintenance, repair, and overhaul MRO industry.

For FY2013 (financial year ended 2013), the aerospace sector provided about 31% of ST Engineering’s sales, and a whopping 44.6% of its net profit. Hiding in plain sight, ST Aerospace has been one of the steady revenue and profit contributors to the conglomerate that is ST Engineering. As Foolish investors, we should look under the hood to understand what the business drivers are for ST Aerospace.

Is there wind beneath its wings?

ST Aerospace revenue breakdown

Source: Company Earnings Report

ST Aerospace can be divided into another three sub-sectors. The largest one would be the aircraft maintenance and modification group which makes up 54.3% of the aerospace sector revenue and a significant 17.1% of ST Engineering’s total revenue for FY2013. This sub-sector also counts itself as the largest independent aircraft maintenance, repair, and overhaul company which operates in the commercial and military space. The aircraft maintenance and modification sub-sector has seen its revenue fly up by 28.7% over the past five financial years.

The second largest sub-sector is the component and engine repair and overhaul group which takes up close to 30% of ST Aerospace’s revenue. The sub-sector also operates in the commercial and military space, and is labelled as the leading aircraft component repair and overhaul station. Lastly, the engineering and material services sub-sector makes up 15.7% of ST Aeropace’s FY2013 revenue. Interestingly, ST Aerospace is also a manufacturer of unmanned aerial vehicles for military and law enforcement purposes.

However, we should not stop at revenue. 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 sub-sectors.

ST Aerospace profit breakdown

Source: Company Earnings Report

The aircraft maintenance and modification sub-sector again brings home the bacon for ST Aerospace, claiming more than 65% of profit before taxes forFY2013. What’s more, this profit has flown up by almost 63% over the past five plus years. This is particularly important as the other two sub-sectors appear to be lacklustre in profit.

The total profit before tax for ST Aerospace in FY2013 was a little over $319 million. This gave a profit (before tax) margin of 15.3%.

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

ST Aerospace geographical revneue breakdown

Source: Company Earnings Report

Unlike ST Electronics, ST Aerospace’s geographical revenue is more spread out globally. Although Asia is still the biggest with a 49% share, the USA makes up a sizable 34.5% of the aerospace sector’s revenue and has grown by around 35% since FY2009.

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 business may head to next.

The aircraft maintenance and modification sub-sector is the clear beacon of revenue and profits here at the aerospace sector. With the largest revenue slice, the largest revenue growth, and increasing profits to boot, Foolish investors might want to keep an eye on this particular sub-sector within ST Aerospace.

It might also pay for investors to watch ST Aerospace’s progress alongside its competitor SIA Engineering Company Limited (SGX: S59). Currently, ST Aerospace is the much bigger player, though it’s not as profitable as SIA Engineering. For the whole of 2013, ST Aerospace’s revenue of S$2.06 billion is around 75% more than SIA Engineering’s revenue of S$1.15 billion. Profitability wise, ST Aerospace has slightly larger profit (SIA Engineering brought home S$305 million in pre-tax profit for the year), though its pre-tax profit margin of 15.3% pales in comparison to SIA Engineering’s 26.5%.

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