SINGAPORE (Dec 20): It has been a good year for engineering group ST Engineering, which has seen all-round growth from its various business units. It received orders from both defence and commercial customers and earnings increased from its existing businesses as well as newly acquired ones.

For example, the company’s newly acquired business, Middle River Aerostructure Systems, helped lift revenue for 3QFY2019 by 53% y-o-y to more than $1 billion. MRA Systems manufactures thrust reversers, engine nacelle components and specialised aerostructures.

CGS-CIMB analyst Lim Siew Khee expects ST Engineering to report earnings growth of 15% for FY2019, with not merely contributions from MRA Systems but also from the delivery of the fleet of Hunter armoured fighting vehicles, which will take around three years. The vehicle is sold to the Singapore military and, as is the usual practice, the contract values are not disclosed. Furthermore, the delivery of smart-city projects will help lift the numbers for ST Engineering’s electronics business too. The company also expects earnings growth from another new acquisition, satellite operator Newtec, as well as from a bigger chunk of aircraft maintenance contracts.

All in, ST Engineering has managed to grow its order book to a record high of $15.9 billion. “ST Engineering fits into the category of defensive growth. We also like its diversification of business,” writes Lim, who has a price target of $4.47 on the stock. Year to date, ST Engineering shares have gained 18.66% to close at $3.95 on Dec 16. At this level, the stock is trading at 23.13 times historical earnings and the company has a market valuation of $12.3 billion. In 2019, ST Engineering is one of the better-performing component stocks of the Straits Times Index.

SIA Engineering

Similarly, SIA Engineering, which is rumoured to be a merger partner with ST Engineering, had a decent year as well. SIA Engineering, majority-held by parent company Singapore Airlines, managed to improve its operational efficiency as part of the SIA group-wide push in this direction.

For 2HFY2020 ended Sept 30, 2019, SIA Engineering reported revenue growth of just 0.7% y-o-y to $512.7 million. However, earnings in the same period increased 11.6% y-o-y to $87.6 million.

“Our transformation efforts are translating into improvements in operating performance through reduced costs and better manpower utilisation. In addition, our digital initiatives are gaining traction company-wide. These efforts better position us to meet the ongoing challenges of an uncertain and difficult operating environment,” said SIA Engineering in a statement.

Year to date, SIA Engineering shares have gained 27.6% to close at $2.83 on Dec 16. At this level, the shares are trading at 18.64 times historical earnings, giving the company a market value of $3.17 billion.

SIA’s transformation

By contrast, parent company SIA’s share price has languished in the past year. Year to date, SIA shares were up just 0.96% to close at $9.12 on Dec 16, valuing the company at 15.59 times historical earnings and giving it a market value of $10.8 billion.

For the six months ended Sept 30, SIA reported group earnings of $206 million, up 5.1% y-o-y, led by higher passenger volume but offset by lower cargo revenue. Revenue in the same period was up 5.3% y-o-y to $8.3 billion.

The single biggest event in the aviation industry this year was the grounding of the relatively new Boeing 737 Max aircraft, after two such planes — operated by Kenya Air and Indonesia’s Lion Air — crashed. Regulators have ordered the grounding of the new plane pending the outcome of investigations.

SilkAir, SIA’s subsidiary for regional flights, had to ground eight Boeing 737 Max aircraft. Besides putting pressure on capacity, the move caused the airline to incur depreciation charges on the aircraft. For now, the order for another 31 Boeing 737 Max planes has not been cancelled.

Interestingly, SIA has been generating higher revenue elsewhere. As part of its three-year digital transformation programme launched by CEO Goh Choon Phong, the SIA group spent the past two years finding ways to make better use of technology to improve customers’ experience, raise operational efficiency and, more critically, boost revenue.

“No stones were left unturned. And, of course, everyone is aware that we have built in new channels for all of our staff to participate in contributing ideas and making them a reality,” said Goh on Nov 6 during its results briefing.

SIA has also formed tighter partnerships with other merchants, such as credit card issuers, to better monetise its KrisFlyer passenger points reward system. At the results briefing, Goh revealed that KrisFlyer revenue in FY2018 was more than $700 million and in FY2019, it was up by about 18%.

In addition, SIA has squeezed additional revenue from KrisShop, which is no longer just the inflight shopping brand but a full-fledged omnichannel e-commerce retailer that the airline operates in-house instead of outsourcing to a retail partner. Now, beyond allowing passengers to order products while flying, KrisShop provides pre-order, payment and delivery services.

“Additionally, the new SIA mobile app, designed for faster performance and improved usability to give customers a seamless and more personalised experience, was launched in August 2019. These initiatives are testament to the group’s aggressive digital transformation efforts,” said SIA in a statement.

The airline warns that it faces tough competition from other carriers, which often offer cheaper fares. One way SIA is seeking to grow is by signing an expanded code-sharing agreement with Malaysia Airlines. From just the Singapore-Kuala Lumpur route, the two carriers — which used to be one, operating as Malaysia-Singapore Airlines — will share capacity to more destinations. In May, Mohshin Aziz, an analyst at Maybank Kim Eng, had suggested that the two airlines should merge.


In the meantime, passenger volume handled by Changi Airport, SIA’s home base, continues to grow. Every month from January to October, passenger movement through Changi has grown y-o-y, with figures ranging from a low of 1.4% (5.6 million) in March to a high of 6.6% (5.3 million) in January.

The growth in passenger volume is good news for ground-handling company SATS, which used to be an SIA subsidiary. For 2QFY2020, the company’s revenue increased 9.8% y-o-y to $497.4 million. Earnings, however, dropped 7.6% y-o-y to $60.7 million. SATS attributes the decline in earnings to lower cargo volume.

Despite the lower earnings, SATS shares have gained 15.45% year to date, closing at $5.10 on Dec 16. At this level, the company has a market value of $5.7 billion and its shares are trading at 24.3 times historical earnings. 

In its Nov 12 earnings announcement, SATS warned that the slowdown in trade and economic growth will cause weaker cargo volumes in key markets. Manufacturers across the region, struggling to deal with the US-China trade war, are at varying stages of trying to reconfigure their supply chains.

On the other hand, SATS’ ground-handling and catering businesses helped contribute to higher revenue. “Even in this difficult environment, SATS continues to generate revenue growth. We will also continue to invest in enabling infrastructure for the longer term such as new kitchens, supply chain capabilities, digital control centres for ground handling and new cargo handling facilities,” said SATS in its results announcement.