Singapore Technologies Engineering shows strong growth

Companies enjoying double-digit revenue and profit increases, a diversified set of customers in growing markets and dividend yields of around 3.5% are always worth a look.

One interesting example is Singapore Technologies Engineering (Singapore: S63), or STE, a company worth S$14 billion (£8.2 billion), with businesses in defence and public security (DPS); commercial aerospace (CA); and urban solutions and satellite communications, or satcom (USS). DPS is the largest division, making up 44% of revenue in the first nine months of 2024, followed by CA with 40% and USS with 16%.

Strong revenue growth for Singapore Technologies Engineering

Revenue growth rates for the period follow the same order, with DPS up 18%, CA up 16% and USS up only 0.3%. Sales for the whole group gained 14.3% to S$8.3 billion for the nine months. The fourth quarter is the company’s strongest, so 2024 revenue is likely to reach S$11.4 billion.

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It is not surprising that DPS grew nine-month revenue by 18%. Donald Trump has made it clear that America’s Asian and European allies must contribute more to their own defence and that is driving rearmament programmes in both regions. This is giving DPS more orders across its diversified product range, which includes fighting vehicles, patrol boats, howitzers and ammunition, drones, command and control systems, cybersecurity and naval ship-repair services.

CA carries out engine and airframe maintenance, repair and overhaul, and is the world’s top independent operator in this subsector. It is benefiting from the backlog of new aircraft deliveries, which means that older aircraft are being kept in service for longer.

However, this has affected the other main CA business, the conversion of older passenger aircraft for carrying freight (P2F). These two divisions compensate each other and, when deliveries of new passenger jets improve, the rise in P2F should make up for any reduction in maintenance work. CA also makes engine nacelles and composite aircraft panels.

What makes STE a stellar stock?

USS has recently won contracts for passenger information systems, rail digital radio systems, a metro upgrade in Taiwan, electronic toll collection and a smart lighting system for an Asian international airport.

The lower growth rate in 2024 was caused by lower satcom sales. ST acquired US firm Transcore in 2022, which added next-generation electronic tolling and transit operations, such as Transcore’s congestion tolling contract for Manhattan. The Manhattan system will demonstrate Transcore’s expertise and be an excellent reference contract for new congestion tolling systems in Asia. Transcore accounts for 35% of USS’s revenue.

STE had a healthy order book of S$26.9 billion on 30 September – two-and-a third years of current annual revenue. New orders in the first nine months of 2024 were particularly strong for DPS, which added S$3.6 billion of new orders, the same as its nine-month sales figure.

STE has a global presence, with hangars for its MRO and P2F operations in Singapore, China (where it services non-Chinese airlines), the US and Europe. It works for airlines including Delta, Air Canada, AirAsia and DHL. STE is Singapore’s main defence contractor but it also sells equipment to 40 other militaries, including the US.

STE’s DPS business enjoys a wide moat – an enduring competitive advantage – based on its government relationships and the switching costs characteristic of command and control systems, surveillance and infrastructure applications.

CA and USS have narrower moats based on intangible assets and switching costs. Earnings per share (EPS) are set to achieve a compound annual growth rate of 14.4% between 2023 and 2028.

STE’s 2023 results show revenue of S$10.1 billion up 11.8%, Ebitda of S$1.46 billion, Ebit, or operating earnings, of S$915 million (up 24.4%), net profit of S$586.5 million (up 17.9%) and EPS of S$0.19. Cash stood at S$353 million on 31 December.

Ebit would have been up 40% had Transcore integration costs, and severance costs incurred by disposing of a non-core business, Satixfy, been excluded. The Transcom business was earnings accretive in 2023 – ahead of plan. The first-half results to 30 June showed higher growth rates, with revenue up 13.5% to S$5.5 billion, net profit up 18.5% to S$416.5 million and cash at S$430 million.

New contracts won in the third quarter include AI-enabled command-and-control systems, cybersecurity products and services, two smart metro systems, healthcare tech for Hong Kong and the STE/Airbus joint venture in Germany delivering its 100th P2F Airbus conversion since starting operations in 2017. The Belgian/ Dutch navies have selected STE to make the electronics for their surface, under-water and aerial mine countermeasure drones.

STE, on a recent price of S$4.48, is rated a “strong buy” by analysts; investment platform Morningstar estimates a “fair value” of S$5.25, giving headroom of 17% above the current price.

The price is also 4% above its 200-day moving average, suggesting a long-term uptrend in the chart. The forward price/earnings (p/e) ratio is 17.4 and the forward dividend yield a welcome 3.53%. Shareholders’ total return over the last three years has been 35%.

Since 2017 STE has been selling off noncore activities, focusing on higher value-added activities, such as the acquisition of Transcore, and improving margins via cost containment. With its diversified business, record of profitable growth and yield, the company is certainly well worth a look.

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