5 Things I Learned From the 2020 ST Engineering (SGX: S63) AGM

Like so many stocks in the market, Singapore Technologies Engineering’s (SGX: S63) share price has fallen drastically due to the COVID-19 crisis.

Singapore Technologies Engineering (ST Engineering) is an integrated engineering group with four key business segments in descending order of revenue contribution: Aerospace, Electronics, Land Systems and Marine.

ST Engineering usually derives about 30% of its revenue from customers in defence-related sectors each financial year.

This is a reason why the company displays greater-than-usual financial resilience compared to a typical company.

While ST Engineering recorded a strong fiscal year in 2019, management made it a point to address investors’ concerns about COVID-19’s impact on the company’s operations as well.

So here are five things I learned from ST Engineering’s 2020 AGM:

1) ST Engineering Recorded Strong Financial Results in 2019

It boasted 17% growth in both its revenue and profits. This increase in revenue was driven mainly by the company’s Aerospace business segment.

Revenue for the Aerospace segment — which comprised 44% of the group’s revenue — increased by 30% year-on-year. This increase in revenue of the Aerospace segment was contributed largely by the newly acquired MRA Systems (MRAS).

ST Engineering’s strong order book also gives it strong revenue visibility in the coming years which are expected to be economically challenging. ST’s order book was near its all-time high at S$15.3 billion as at the end of 2019 due to contract wins worth S$8 billion in 2019.

The company’s aerospace and electronics segments also secured more than S$1.6 billion in new contracts in Q1 2020.

However, the company is held in discussions with its customers to adjust delivery schedules or address order cancellations due to COVID-19.

2) ST Engineering’s Airframe MRO and Satellite Communications Acquisitions

ST Engineering made acquisitions to strengthen its dominant positions in the Airframe MRO (maintenance, repair, and operations) and Satellite Communications (Satcom) Ground segments.

In the airframe MRO segment, the company made a US$630 million acquisition of MRAS from General Electric via its U.S. subsidiary in 2019.

This allows ST Engineering to scale up its aerospace capabilities in the U.S. by moving upstream into the high-value original equipment manufacturing of engine nacelle systems. (A nacelle is a housing, separate from the fuselage, that holds engines, fuel, or equipment on an aircraft.)

ST Engineering CEO Vincent Chong updated that the MRAS integration is progressing well and this strengthens ST’s position as a globally integrated aviation solution provider.

ST Engineering also established a presence in Vietnam via an MRO joint venture with Vietnam Airlines Engineering Company. This allows ST Engineering to capture the increasing demand for MRO services in Vietnam and in the APAC region.

3) ST Engineering’s Acquisition of Newtec and Glowlink

In the Satcom ground segment, the €250 million and US$20 million acquisitions of Newtec (now known as iDirect Europe) and Glowlink respectively in 2019 allow ST Engineering to create a highly differentiated global Satcom business group.

Newtec is a Belgian-based technology provider in the satellite broadcast segment with ultra-high-throughput capabilities and a strong presence in the European Satcom market. ST Engineering’s acquisition of Newtec allows it a strong presence in Europe.

Complementing Newtec is the acquisition of Glowlink, a U.S.-based company known for its advanced Satcom anti-jamming technologies that detect, geo-locate, and cancel signal interference.

The combined acquisitions of Newtec and Glowlink will help ST Engineering participate in the future growth of Satcom and smart cities.

4) ST’S Engineering’s Smart City Projects

In strengthening its Smart City track record, ST Engineering notched more project wins in the areas of smart security, smart environment, and smart mobility in 2019.

The number of Smart City projects ST Engineering has undertaken now stands at over 700 across 130 cities. The impetus for the company’s venture into the Smart City space lies in the rapid urbanisation of humankind.

Hence, its technological capabilities can help cities create smarter and more sustainably built environments for people to work, live and play.

For example, one of ST Engineering’s key contract wins involves providing Taiwan’s Taoyuan MRT green line with rail electronics solutions including train-borne communications, platform screen doors, automatic fare collection and supervisory control and data acquisition Systems.

Below are some of ST Engineering’s notable contract wins in the area of Smart City:

5) CEO Expects ST Engineering to Be Operationally Resilient Amidst COVID-19

The pandemic will affect the company in three main ways: reduction in customer demand, supply chain disruption, and workforce disruption.

The reduction in customer demand will account for ‘two-thirds’ of the negative impact the company will suffer due to COVID-19.

With ongoing air travel restrictions, the aircraft maintenance requirements of airlines would naturally reduce. However, the impact will be mitigated in several ways.

First, ST Engineering has diversified revenue streams in terms of business sectors, defence/commercial customer split, and geographies.

Moreover, many of the company’s subsidiaries in Singapore and around the world have been classified as a provider of essential services.

Hence, many subsidiaries continue to operate ‘substantially’ from their premises (including aerospace hangars, shipyards, automotive factories and electronics workshops) during this period.

However, the disruption caused by remote working will have some impact on the company’s productivity since its worksites cannot operate at their optimal capacity.

The CEO also mentioned support from various government aids and stimulus packages which were not specified.

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