Investors are running for cover in the Ukrainian war. But, a seed planted on this island in 1967 could provide a haven.
Dr Goh Keng Swee, the then defence minister, founded Singapore’s arms industry 55 years ago. He was a towering figure in Singapore.
ST Engineering, his brainchild, could emerge as a vital cog in Europe’s defence.
Goh was born in Malacca in 1918. He was one of the first Malayans to secure a PhD from the London School of Economics and Political Science. While he was a student in Britain, he was an earlier campaigner for the independence of British Malaya, which then included Singapore.
Goh was entrusted with senior Cabinet positions at different stages, including the defence portfolio in 1965. Singapore had just separated from the Malaysian Federation.
The new, tottering city-state was insecure. It was surrounded by hostile neighbours. There was no standing army. The Singaporean police had barely thousand firearms.
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Goh created the national service. At the age of 18, every Singaporean male would serve for around two years.
In 1967, Goh founded Chartered Industries of Singapore (CIS). It had the licence to produce American M16 rifles and its ammunition. The Singapore Armed Forces were its main customers.
Goh was a leader of immense ambition. He wanted to start an engineering company that would not just supply Singapore’s needs, but that would also become an international supplier. By doing so, it would cement Singapore’s strategic needs.
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Eventually, CIS morphed into a listed conglomerate — ST Engineering. It now supplies arms and aerospace equipment to over 30 countries. It is one of the few listed defence companies in Asia.
About half its revenue comes from the defence segment. The rest is from other engineering services, such as commercial aerospace and electronics.
The last fortnight has been horrific. The media has focused on the suffering. Investors have been consumed by the upheaval in the markets. But, the arms race has been frenetic.
In the space of two weeks, the invasion has set off one of the most intense arms races in history. The Czech Republic has sent 10,000 rocket propelled grenades to Ukraine this week. The provincial airports in Poland are crowded with military cargo. Commercial flights in many cities have had to be diverted by the military cargo.
Following years of cutbacks, Europe is now short of defence equipment. Nato is now rearming. The countries that are outside Nato such as Georgia, Lithuania and Serbia are shopping for arms.
The situation in Europe today is similar to the US in 2001. The US defense industry entered the 9/11 crisis after many years of under investment.
The five American defence companies like Lockheed Martin and Raytheon prospered. They were beneficiaries of the government’s defence largesse. An US$1 invested in these five “defence diamonds” on Sept 10, 2001, would be worth US$7.30 ($10) today.
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Defence stocks are excellent investments during strife. These companies have consistent earnings due to government contracts. The cash flow can be volatile as receivables can be high.
But, the collection risks are low. The main customers are governments. The European industry is facing the same difficulty that the US defence sector had in 2001.
Defence spending in the EU has fallen 10% in real terms since 2008. Europe’s defence industry has suffered due to budget cuts. There is a shortage of combat aircraft and land vehicles. According to IHS Janes, an intelligence organisation, the shortage may be as high as 30%.
Singapore has been proactive in sanctioning Russia. Four Russia banks have been sanctioned by the Monetary Authority of Singapore. Severe trade restrictions have been imposed.
These measures would place ST Engineering in an ideal position. The West would view Singapore’s defence industry as a natural ally.
The company’s product catalogue has expanded in both scope and sophistication: from relatively simple bullets of the initial years, ST Engineering can now make sophisticated missiles. It can also design and build armoured vehicles and ships.
ST Engineering is trading at just 15x FY22 P/FCF. This is a sharp discount to the Western defence peers.
At just four times its order book, it is cheap. The defence ETFs have seen record inflows in the last fortnight. ST Engineering may benefit. ST Engineering stands out for its low net gearing (0.5x) and strong dividend yield (4%).
In 1967, few people would have bet that Goh would create a defence giant. In 2022, it may once again defy expectations.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns