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Dissecting Singapore Technologies Engineering Ltd’s Profitability

Previously, I wrote about Singapore Technologies Engineering Ltd (SGX: S63), or STE, and its various divisions, and also gave a brief description and introduction to what STE does as a diversified engineering group. This Singapore blue-chip company is one of the largest engineering companies listed here, and it has four main divisions – aerospace, marine, land systems, and electronics.

I was curious to know which of STE’s divisions showed the most growth and the highest profitability, so I decided to take a look at their latest segment report. A segment report is a snapshot of a company’s various divisions, their revenue numbers, and also their profitability. This allows an investor to dig deeper into what drives the profitability for a company, and also to assess if management is channelling resources to the division(s) with the best profit margins and prospects.

STE’s divisional profitability

Source: STE’s Q1 2019 Earnings Report, compiled by the author

In the table above, I have listed out the key revenue and net profit figures for STE’s four main divisions for both Q1 2019 and Q1 2018. In addition, I calculated the year-on-year growth in revenue and net profit for both divisions as well, to assess if net profit managed to grow along with revenue or if costs overwhelmed the revenue growth.

Aerospace division is the most profitable

The table shows clearly that aerospace division has the highest profit margin of all four divisions, at 10.1%, while the rest are either in mid- or high-single digits. The aerospace division has also seen a 3% year-on-year growth in revenue and a 6% year-on-year increase in net profit – both are indications that this division is doing well indeed. Moreover, the net profit margin also increased from 9.9% to 10.1%. Although this is a small increase, it demonstrates that the division has become more cost-efficient.

STE’s most recent announcement for its aerospace division was back in February 2019 when it announced a US$600 million contract to provide aircraft heavy maintenance to a major North American customer.

Division profitability has improved overall

Three out of four divisions saw their profit margins improving (Land Systems is the only division which saw a drop) on a year-on-year basis, and this is very positive as it shows that the conglomerate is actively working to increase its margins for all their divisions. Land Systems, however, contributed to the highest jump in year-on-year revenue, but still saw a 2.2% year-on-year decline in profitability. Management should look into improving the margins for the division, so as to boost overall group profitability further.

An overall decent performance

Investors should note that STE reported a decent year-on-year performance for its Q1 2019, but just one division – Land Systems contributed most of the revenue growth. Profitability improvements were broad-based, except for Land Systems, which is an encouraging sign.

However, I should caution that these are the numbers taken from just one quarter. Investors should extract the numbers either on a year to year basis (to smooth out any effects of seasonality) or use at least three to four quarters worth of data, in order to be able to identify more trends.

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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 Royston Yang does not own shares in any of the companies mentioned.