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Is This Emerging Industry A Huge Opportunity For Singapore Technologies Engineering Limited?

Singapore Technologies Engineering Ltd  (SGX: S63) is an engineering conglomerate with interests in multiple industries. One particular industry, though, is emerging as a significant opportunity for the conglomerate.

The internet of things (IoT) could be the industry to keep our eyes on.

Today, connecting to the internet is typically done through a smartphone or a computer. The IoT can be thought of as the internet for physical objects, which may see “things” like your shoes or coffee mug be connected to the internet.

Big numbers

The growth of the IoT is expected to be huge.

Research company Gartner estimates that 6.4 billion connected “things” will be in use this year. Services spending could reach $235 billion in 2016, a sizable 22% year-on-year increase from 2015. The growth could spell opportunity for ST Technologies, especially its ST Electronics division.

The electronics division made up 24% of ST Engineering’s revenue last year. The composition of the division is diverse, with involvement ranging from cyber-security to utilities and data centres. The IoT opportunity, as described by ST Engineering, is captured in a snippet from its 2014 Annual Report:

“Another exciting new development is in the area of Smart, Sustainable and Safe City solutions, which include an IOT (Internet of Things) concept behind a comprehensive suite of solutions to address the needs of a smart and connected nation.

Participating in Singapore’s Infocomm Development Authority (IDA) Smart Nation initiative, ST Electronics secured a strategic win for the Jurong Lake District testbed which comprised pilots and trials of various applications.

A key component to this complex system is the Smart Nation Platform that encompasses the common infrastructure and technical architecture to support a smart nation ecosystem. An intelligent sensor grid will be coupled with a video management and analytics system to provide real-time urban situational awareness. Data collected on the behaviour and preferences of the community will be used to develop applications to give residents in the test area a better living experience.”

ST Electronics could use some help from growing industries. Unfortunately, the division hit a snag last year when revenue fell. This was mainly due to lower revenue from its Communications and Sensor Systems sub-division.

2016-01-11 ST Electronics Engineering Revenue

Source: ST Engineering’s earnings report

Over the first nine months of 2015, ST Electronic’s revenue figures look more promising – the division’s sales grew 9% year–on-year.

This could improve further. In July 2015, ST Electronics secured contracts worth $285 million. These contracts include its Galaxy M2M Communications system, a Smart City solution.

Context, though, is needed to understand the impact of the new contracts.

ST Electronics made $1.6 billion in revenue for 2014. So, the aforementioned contracts are sizable at the divisional level. But, for a broader picture, ST Engineering recorded $6.6 billion in revenue for 2014. The aforementioned contracts would amount to less than 5% of ST Engineering’s revenue.

To be sure, growth in areas, however small, is a welcome sight at ST Engineering. That’s perhaps even more so when the conglomerate’s Marine sector had suffered a 27% drop in revenue for the first nine months of 2015.

Foolish takeaway

The IoT trend could have far reaching implications for ST Engineering in the future. The increase in data usage could lead to growth in data centres, which is another area where ST Engineering operates in. The use of sensors could also increase in the aerospace and marine sectors.

But at the moment, ST Engineering may need more to meaningfully move the needle.

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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.