ST Engineering made $1b from smart city business in 2017

It is eyeing to double this in 2022 through acquisitions and organic growth.

According to DBS Equity Research analyst Suvro Sarkar, ST Engineering has for the first time put a number to its Smart City business – $1b in revenues in 2017, and they expect this to more than double by 2022. “Management believes organic growth alone is enough to get them to the lower level of the forecast (i.e. non-smart city growing at 2x global GDP growth rate), and acquisitions will help boost that further,” he said.

In terms of geography, two-thirds of the revenue growth is expected to come from global markets (non-Singapore). “Given that the growth targets based on guidance imply that 25-35% of the incremental growth will come from smart city projects, we expect the growth is probably back-loaded towards the end of the forecast period, as we think various smart city initiatives are still in their ramping-up stages,” Sarkar added.

ST Engineering projects a US$1.7t global market for defence annually. “The US and the Middle East were cited as key opportunities for defence exports. The US is already the largest defence market, with steady growth, whilst the Middle East is expected to grow at c.9% per annum going forward. The Group will also continue to target Latin America, Europe and the Rest of World,” the analyst said.

Sarkar said ST Engineering’s offerings included their smart soldier system – a range of wearable infantry products that give soldiers on the ground more situational awareness and improves warfighting capabilities, and unmanned aerial, ground and sea-going vessels.

Meanwhile, whilst the segment’s legacy conversion programmes (e.g. 757-200) are at their tail end, the new A321/320 and A330-200/300 P2F programmes are gradually ramping up, and ST Engineering expects these programmes to contribute over $400m per annum by 2022 when they are in steady-state. “On margins, it was mentioned that Aerospace margins were highest when the legacy 757 and MD11 programmes were at their peaks in terms of aircraft converted annually, and management alluded that margins should likewise be given a boost when the new P2F programmes hit steady state,” Sarkar said.

Its aircraft fleet is expected to expand from the current 5 to over 50 by 2022. Sarkar noted that ST Engineering will extract value not just from the leasing profits but also from asset management, MRO work, and either partout or P2F conversion. “We had previously estimated that each aircraft could contribute ~$1m in PBT from leasing profits alone,” he said.

However, marine revenue has yet to recover to 2013-2014 levels, implying a doubling of revenues from 2017 levels. “Based on our understanding, the potential drivers of this are: i) growth in the environmental engineering business; ii) growth in recurring parts of the business (e.g. ship repair); iii) inorganic expansion (e.g. recent acquisition of rig repair yard in the US); iv) an upswing in global naval shipbuilding beginning in 2020 and accelerating in 2021/22; v) growing their product offerings (one example given was the conversion of Platform Supply Vessels which serve the oil & gas industry to Service Operation Vessels, which are used for offshore wind farms),” Sarkar said.

Overall, ST Engineering expects a cumulative $150m in net cost savings over the next five years from amalgamating its shared services functions within the Group.

The growth will also be supported by ST Engineering’s orderbook. Its timeline is generally between three to five years and about 60% of yearly revenue comes from the orderbook. “Management estimates about $3.8b to be recognised from the orderbook of $13.2b as of 4Q17,” DBS said.