In its inaugural investor day, ST Engineering provided a clearer picture of the drivers for its long-term growth. Management also revealed their target for 2022.
ST Engineering’s CEO Vincent Chong shared his five-year plans for the group through strengthening the core business, pursuing growth opportunities in defence export and the smart city segment. In order to improve margins, the group will work on costs optimisation.
According to UOB Kay Hian, ST Engineering’s growth potential lie the prospects of smart city projects, rising defence exports, growing aircraft fleet and cost savings coming from altering shared services within the group.
Smart City Projects
The development of a smart city involves three key areas, namely smart security (both cyber and public security), smart environment, and smart mobility.
In terms smart security, UOB Kay Hian believes that “ST Engineering has already secured cyber security related contracts” but is unable to disclose these orders. One such product would be the “Black computer” which is said to be able to improve security yet is also immune to internet viruses. Other products include using drones to ensure public security and for tracking purposes.
In this segment, ST Engineering has a competitive advantage over its competitors as it can provide “both front-end solutions and back-end support”, this ensures that profits are not cut off upon delivery of products, as future follow-up services will also continue to bring in profits.
The group has stated that its revenue for smart city projects stood at $1 billion in 2017, and hopes to more than double it by 2022, forming a key growth driver.
Citing the rising demand for defence products globally, ST Engineering is targeting markets such as the US and the Middle East to export their defence products. One product showcased at the investor day is the smart soldier system which is a range of wearable infantry equipment which helps to provide more “situational awareness and improves war-fighting capabilities” for soldiers. Rising military expenditure from these countries is likely to see ST Engineering winning more contracts and bringing in more revenue.
Expanding Aircraft Fleet
ST Engineering is looking at their new A321/320, A330-200/300 passenger to freighter programmes to bring in more than $400 million per annum by 2022. Such programmes work to convert aircraft built to carry passengers into ones that are suited for cargo transportation.
ST Engineering is now purchasing mid-life aircraft instead of newer ones to reduce the price of purchase and making use of their maintenance, repair and overhaul (MRO) operations to extend the lifespan of these aircraft. The fleet is expected to increase to more than 50 by 2022 (currently there are only 5).
Each aircraft has been estimated to be able to bring in $1 million in profits before tax from leasing profits alone, according to another report from DBS research.
ST Engineering is also looking to increase its margins by cutting costs through “amalgamating shared services and functions within the group”. The group has aimed to cut down on overheads and increase efficiency, which may also see stronger collaboration between ST Engineering and its strategic partners.
These efforts have been estimated to produce $150 million worth of cost savings by 2020. Overall, DBS is positive of the outlook of the group, given its clearer growth drivers and hence it increased ST Engineering’s target price to $4.10.
UOB Kay Hian also favour the stock, giving it a Buy call with a fair value of $4.10 as well. ST Engineering is now trading at about $3.55.