4 Quick Things Investors Should Learn About Singapore Technologies Engineering Ltd’s Largest Segment, ST Aerospace

Singapore Technologies Engineering Ltd (SGX: S63), also known as ST Engineering, has its fingers in many pies. This is evident from the company’s major business sectors, namely, Aerospace, Electronics, Land Systems, and Marine.

The engineering conglomerate announced its 2016 fiscal first-quarter earnings a month ago and had delivered a presentation of its results. A summary of the revenue contribution from ST Engineering’s various sectors is shown in the slide below from the presentation deck:

2016-06-21 ST Aeropace ST Enginering Revenue
Source: ST Engineering’s earnings presentation

The Aerospace sector is the largest of the lot, contributing 38% of ST Engineering’s overall revenue in the first-quarter of 2016. It’s worth noting too that the sector is also the one with the highest profit before tax (PBT) margin.

You can see the PBT margins of ST Engineering’s various sectors in the following slide:

2016-06-21 ST Aeropace ST Enginering Margin
Source: ST Engineering’s earnings presentation

As such, it may be useful to understand how ST Engineering’s Aerospace sector is positioning itself for the future. Lim Serh Ghee, ST Aerospace’s President, had shared some thoughts about the sector during the earnings briefing.

2016-06-21 ST Aeropace ST Enginering Forecast
Source: ST Engineering’s earnings presentation

Lim had two key points to make on the slide seen just above:

“The first is that Asia is going to be the region that is going to receive most of the new aircraft delivery. Roughly, 55% is for freight growth, 45% is for freight renewal.

The second point that I would like to highlight is that the platform type that will see the highest growth is the narrow body. The high freight renewal number is positive for P2F [passenger to freighter conversion] business – i.e. feedstock to the passenger to freighter program.”

Lim also spoke about how ST Engineering’s Aerospace sector is positioning itself for future growth. He referred to the slide below:

2016-06-22 MRO Market
Source: ST Engineering’s earnings presentation

Lim said:

“The growth in the fleet size globally will obviously fuel the MRO [maintenance, repair, and overhaul] spend. Again, I would like to highlight two points. The first one is that the modification segment will see the highest growth.

The second one is Asia Pacific will overtake US [United States] as the largest MRO market. US is still sizable and more importantly, US is one of the regions where the airlines outsource the most.

Our footprint, in both capabilities, such as passenger to freighter conversion, cabin reconfiguration as well as our presence in China and US will position us well to partake in this growth.”

Lim acknowledged that profits have been flat. But he also argued that ST Aerospace is investing in new capabilities and capacity and to expand its presence in high growth regions. As an example, he said that ST Aerospace will double its capacity in its Guangzhou facility. Lim said that the benefits might not appear in the short term, but he expressed strong confidence that it will position ST Aerospace well for many years to come.

Investors might want to observe if any top-line growth in the Aerospace sector will translate into profits somewhere down the line.

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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.