Singapore Technologies Engineering: A Stock With Sustained Growth Potential

The aerospace and defense industry is a big one and I’m always looking for new companies to add to my coverage and uncover any value in the companies I add to my coverage. With this report, I am adding Singapore Engineering Technologies (OTCPK:SGGKF) (OTCPK:SGGKY) to my coverage. As this is the first time we have covered the company, I will briefly discuss the company’s activities, followed by a discussion of the latest results, discuss risks and opportunities, and set multi-year price targets along with a rating for the stock.

What does Singapore Technologies Engineering do?

Singapore Technologies Engineering is a large company with a market capitalization of US$10.6 billion and a wide range of products and services. The company is active in the following end markets:

• Aerospace
• Defense
• Smart city
• Marine
• Digital technology

So if you are looking for for a company with a broad product portfolio, STE certainly ticks the boxes. The Aerospace segment consists of Aerostructures and Systems, which includes cabin interior fit-out, cargo ship conversion, composite panel manufacturing and nacelle manufacturing. The MRO segment focuses on aircraft and engine services, and the portfolio of supported platforms includes the CFM LEAP and CFM56 engines, which are the most popular turbofans in service today. The third and final component of the aerospace business is the aircraft and engine trading business where ST Engineering trades and leases engines and aircraft.

The Defense & Public Security segment includes Defense Aerospace, Digital Systems & Cyber, Land Systems and Marine. This is a large area of ​​operations with land, air, maritime, as well as C5ISR, homeland security, training, cyber security, data, AI and cloud solutions. The final segment is Urban Solutions and Satcom, which includes intelligent solutions for rail, road and urban infrastructure as well as satellite communications.

Mixed results, but earnings look good

H1 2024 revenue rose 14% to SGD 5.5 billion. For reference purposes: one Singapore dollar is around US$0.77. That would mean the revenue was around $4.25 billion. EBIT increased by 18% to SGD 523 million, indicating a margin expansion of 9.5%, while profit before tax increased by 19% and net profit increased by 20%. The order book at the end of the first half of 2024 was SGD 27.9 billion.

Commercial aerospace revenue increased 20% to SGD 2.2 billion, while EBIT increased 7% to SGD 190 million. The revenue increase was driven by 32% higher sales for Aerospace MRO, 20% higher sales for Aerostructures & Systems and a 17% increase in assets under management. EBIT growth lagged behind sales growth and this was partly driven by lower asset sales. Excluding asset sales, EBIT would have increased 13%, with some margin pressure due to parts shortages resulting in lower parts sales, extended MRO lead times and sales pressure for OEM sales . In addition, an increase in cargo vessel conversion activity, which has a lower margin, also impacted the composite margin.

Defense and Public Security sales increased 12% to SGD 2.4 billion, while EBIT increased 8% to SGD 324 million. Defense aerospace and land systems sales increased 5%, while digital solutions sales increased 16% and marine sales increased 19%. Also in the DPS segment, sales grew faster than margins and this was driven by higher depreciation and amortization of SGD 16 million related to an acquisition that triggers an advance backlog write-off, which is standard practice.

Urban Solutions & Satcom segment sales rose 3% to SGD 918 million, while EBIT increased from a loss of SGD 34 million to a profit of SGD 9 million. The segment’s earnings show the challenges facing the Satcom business, where competition is intensifying and communications bandwidth congestion in low Earth orbit is changing some projects to operate with satellites in a geostationary orbit, but that is changing project costs and required funds. So it’s not an easy business to be in nowadays. The good news was that due to lower revenues for the Satcom business, results improved and this was driven by cost efficiency initiatives.

Overall, the results showed strong demand in the aerospace segment. Satcom remains weak, but defense offers opportunities as international sales accelerate, which could also drive higher volumes, which could boost margins.

What are the risks and opportunities for ST Engineering?

ST Engineering faces both risks and opportunities. The first risk is the challenging environment for satellite communications equipment and services, the second risk is parts shortages that increase aircraft lead times and engine shop visits, and these parts shortages also result in lower OEM production low. There are also opportunities. For the satellite business, there won’t be overnight growth, but the company is actively managing costs as parts shortages increase demand to bring older aircraft back into service, which drives the MRO business for ST Engineering. Additionally, in the long term, OEM production rates will begin to improve, which should benefit ST Engineering, while more aircraft and engines will undergo routine maintenance, which will also lead to business results. In the freight market, increased e-commerce demand will drive conversion activity and allow the company to expand its margins. For the defense business, the current demand environment will also drive higher volumes, which would enable better absorption of fixed and variable costs.

Singapore Technologies Engineering shares are a buy

To determine multi-year price targets, the Aerospace Forum has developed a stock analysis tool that uses a combination of analyst consensus on EBITDA, cash flows and the latest balance sheet data. Each quarter, we review those assumptions and stock price targets accordingly. In a separate blog I detailed our analysis methodology.

ST Engineering is not a company that will significantly reduce its gross debt. Instead, it will likely continue to refinance the debt. What I like about the company, however, are the diverse end markets that have growth potential. Additionally, I believe EBITDA will grow at a CAGR of 7% and FCF will grow at a CAGR of 16%, which makes a compelling investment case as the company continues to trade at a discount to peers. At current prices and given FY24 earnings, the company offers little upside. However, I think at this point it is reasonable to look at FY25 earnings, which would imply an 11% upside. With that in mind, I mark the stock as a buy with a price target of $37.83.

Conclusion: ST Engineering could provide long-term value

I believe ST Engineering is well positioned to deliver long-term value. The company is seeing increased international demand for defense products, which could increase volumes and margins, and this is likely to remain so in the coming years. Demand for air travel is also a long-term trend that the company can capitalize on and with aircraft and engine MRO capabilities as well as exposure to OEM sales, the company is well positioned to capitalize on growing demand for air travel and new planes.

Since the OTC tickers SGGKY and SGGKF do not have significant volume, which could make buying and selling at the desired prices and in the desired quantities challenging for those interested in buying shares, I would recommend checking out the STEG ticker. SI on Singapore stocks. Change.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.