EUR 850.00 For Business Accounts Only

Morningstar | We Raise Our ST Engineering FVE on Improved Capital Efficiency

After a challenging few years, Singapore Technologies Engineering is resuming a strategy to drive growth through improved utilization of its capital alongside a plan to contain costs. It is continuing to sell off noncore activities, which has so far included construction equipment-related businesses in Asia, to focus on areas that will provide synergies to its key aircraft maintenance and smart city activities. In this regard, it is adding proprietary product makers to its stable. Overall, we see STE’s EPS growing at an average five-year compound annual growth rate of 13%, marking a sharp improvement over flat earnings in the five years to 2018, with operating margin recovering to a pre-2014 level. Cyclical recoveries in the land systems and marine segments are also driving part of the pickup in earnings.A key challenge for STE is the increasingly competitive aircraft maintenance, repair, and overhaul, or MRO, industry. Backward integration by original-equipment manufacturers such as Boeing, as well as new MRO service centers in emerging countries, are leading to some cannibalization of activity away from traditional MRO service providers. In addition, the relatively young age of the global aircraft fleet and enhanced data use point to reduced need for heavy maintenance, which is one of STE’s main focuses. However, we think STE will be able to defend its leadership as the world’s largest independent third-party MRO service provider and sustain returns with its global coverage and diversified services. Excluding impending acquisitions, we expect STE’s aerospace segment revenue to be largely in line with the industry at 5% growth, but with proposed acquisitions, revenue CAGR will rise to 16% through 2023.STE will also continue to benefit from opportunities to commercialize products and services that it has developed as Singapore’s main defense contractor, including command and control platforms, surveillance, sensor, communications infrastructure, and cybersecurity. Smart city and Internet of Things applications will drive revenue growth for the electronics segment at an average 10%.