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ST Engineering Ltd: 3 Signs of Improvement

Singapore Technologies Engineering Ltd (SGX: S63), or STE, is an engineering conglomerate with businesses engaged in four main sectors – aerospace, electronics, land systems and marine. The group employs about 22,000 people across Asia, North America, Europe and the Middle East, and serves customers in the defence, government and commercial sectors in over 100 countries.

Having multiple divisions is both a good and bad thing for STE, as different divisions may grow or decline at different times, thus providing some buffer in case of a protracted slowdown in either one of the divisions. However, it also means that sustained growth for the group may be tough to achieve as it is difficult to fire on all cylinders at the same time.

However, in STE’s latest earnings release, I spotted three clear indications of improvement for the group. This may be the start of a sustained growth spurt for STE, as it seeks to climb out of the funk it has found itself mired in the last five years.

1. Net profit increasing

STE reported an 8% year-on-year rise in revenue for Q2 2019, and net profit jumped by 18% year-on-year to S$138.2 million. The breakdown of profit before tax (PBT) shows that most of this improvement came from the marine division, where PBT soared 69% year-on-year to S$17 million. This was even though marine division’s revenue was down slightly, as improved US shipbuilding performance greatly boosted margins.

Though it may seem that the other three divisions are lagging, the aerospace division has a catalyst for future earnings which I will discuss below.

2. Record order book

The group reported a record-high order book of S$15.6 billion, as of 30 June 2019, of which S$3.8 billion is expected to be delivered and recognised in the second half of this year. This is great news for investors who worry about the visibility of the group’s revenue, as this level of order book provides comfortable assurance for revenue to be recognised over the next few years, as mentioned by STE’s President and CEO Mr Vincent Chong.

3. MRAS acquisition

STE recently completed its largest acquisition to date in April 2019 – that of MRA Systems, LLC (MRAS) for a consideration of US$506 million. The announcement of this significant acquisition was first made in September 2018, and MRAS is now an indirect wholly-owned subsidiary of STE.

This acquisition is earnings-accretive for STE and will boost the aerospace division’s capabilities to include original equipment manufacturing of high-value nacelle systems and replacement parts. It also vastly expands STE’s network of facilities in the US to support its widening customer base.

A matter of time

This major acquisition may be the game-changer that STE needs to kick-start its next leg of growth. Along with a record order book and better prospects for all its divisions, I feel it is a matter of time before all these translate to a sustainable top and bottom-line improvements for the group. Though STE has kept its interim dividend constant for now (at 5 Singapore cents per share), the future looks bright for the group so investors need to keep the faith.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.