The Growth Story of Singapore Technologies Engineering Ltd

2014 wasn’t a good year for Singapore Technologies Engineering Ltd (SGX: S63) as it saw its annual profit decline by 8% to S$532 million compared to 2013. It was the first time in five years that the aptly-named multi-sector engineering outfit had seen a drop in profits.

With a strong long-term track record (ST Engineering’s profit had grown steadily by 6% per year on average from 2003 to 2013), is 2014’s decrease in profitability a short term issue for the company or the start of a long term decline? Let’s take a look.

According to the comments made by ST Engineering’s management in its latest earnings release, it seems that the company’s impacted by the slowdown in China and the challenging economic environment in Europe.

In China, the government had just reduced the country’s economic growth target for 2015 to 7%, the lowest target in 25 years. As for Europe, the continent is still struggling to turnaround its economy though things might be improving soon with news that the European Central Bank (ECB) has finally set 9 March as the date at which it would start its quantitative easing programme.

Besides the potential for an European economic recovery, there are still other tailwinds for ST Engineering.

With the rise of extremism around the world, the need for better defence systems for nations is important. In Asia, the rise of China’s military presence has been quite obvious over the last few years; with multiple contests over territories between China and other Asian nations in the South China Sea, there is a real need for smaller nations around the region to beef up their military capabilities.

All these point to growing demand for defence spending by countries and might benefit ST Engineering in the future given that nearly 40% of the company’s revenue in 2013 came from defence-related work.

In addition, ST Engineering could also benefit from the growing demand for air travel, especially in Asia; the company’s the world’s largest maintenance, repair and overhaul (MRO) services provider for the aviation industry.

Foolish Summary

There is no clear indication of when ST Engineering might turnaround its profit decline. But, it’s worth pointing out that the products and services provided by the company do seem to have strong demand. ST Engineering’s strong balance sheet, with a net-cash position of S$582 million, also gives the firm the resources to engage in growth opportunities.

Investors will have to wait and see if ST Engineering can successfully grow its business again in the future.

Learn more about investing through a FREE subscription to Take Stock Singapore. Sign up here to The Motley Fool's weekly investing newsletter that will teach you how to GROW your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest,better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own any company mentioned above.