EUR 850.00 For Business Accounts Only

Morningstar | Defense and security contracts help mitigate increasing competition in aircraft maintenance.

Investors favor Singapore Technologies Engineering, or STE, for its stable dividend outlook and relatively attractive yield. We believe this has helped mask disappointing earnings growth over the past 10 years. While revenue grew at a CAGR of 4.5% during 2006-16, earnings were largely flat, with growth of less than 1.0% as margins shrank. However, we expect STE’s margins to stabilize over the next few years and growth to resume, helped by the closure of nonperforming assets and better-placed investments. Smart City-related projects and product sales are expected to drive revenue growth, with sales expected to double by 2022. In addition, defence exports should underpin revenue at its land systems and marine divisions.The immediate challenge for STE is the increasingly competitive aircraft maintenance, repair, and overhaul, or MRO, industry. Backward integration by original equipment manufacturers such as Boeing is expected to put pressure on the MRO service market. In addition, the relatively young age of the global aircraft fleet and enhanced data use point to a reduced need for heavy maintenance, which is one of STE’s main focuses. However, we think STE can defend its leadership as the world’s largest independent third-party MRO service provider and sustain returns with its global coverage and diversified services. We expect STE’s aerospace segment revenue to be slightly above that of the industry at 6.6% annual growth through 2022, and a gradual improvement in margins should drive an earnings CAGR of 9.4%.STE will also continue benefiting from opportunities to commercialize products and services that it has developed as Singapore’s main defense contractor. Its command and control platforms and its surveillance, sensor, communications infrastructure, and cybersecurity products are seeing relatively robust demand from both the public and private sectors. The acquisition of a nationwide fiber-optic network that sits on Singapore’s electric utility backbone should enable STE to drive its Smart City services, including resource and security controls for buildings.