What Is Going On With Singapore Technologies Engineering Ltd’s Profit In 2016?

Singapore Technologies Engineering Ltd (SGX: S63) is an engineering conglomerate with its fingers in many pies.

To the point, it has four major business segments, namely, Aerospace, Electronics, Land Systems, and Marine. Within those segments, the company is in a variety of sectors including defence, information communication technologies (ICT), and global maintenance, repair, and overhaul (MRO).

Just a few weeks ago, Singapore Technologies Engineering, or ST Engineering for short, had released its 2015 fourth-quarter earnings. In its earnings presentation, the company had provided some guidance for how its business will fare in 2016. This is shown in the slide below:

2016-03-14 ST Engineering Outlook
Source: ST Engineering’s earnings presentation

On the surface, the summary implies that ST Engineering will be offering higher revenue but comparable or flat profit in 2016. In other words, the company’s profit margins could be squeezed. This was a subject broached during the presentation.

Lee Fook Sun, ST Engineering’s deputy chief executive, shed some light on the company’s thoughts behind the outlook:

“For the next year, we are forecasting higher revenue but comparable PBT [profit before taxes] because of, I would say two factors.

“Number one is that we plan to be investing more on R&D [research and development] so that would have some impact on our PBT. Number two is that there is also a bit of uncertainty on the mix of the revenue that will be coming in.”

Lee also clarified on what the word “comparable” really means:

“… But when we say comparable, it’s like plus or minus five percent. What we are really saying that it is likely to be in the plus range and not the negative range of the percentage.”

At the moment, it will be interesting to watch for improvements in ST Engineering’s ability to generate operating cash flow and free cash flow. In 2015, ST Engineering had seen sizeable declines of at least 25% in its operating cash flow and free cash flow. If it is stable and safe dividends from ST Engineering that investors are looking for, the two financial figures might be the ones that matter.

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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.