ST Engineering reveals accumulated war chest for M&A

Are there targets already?

According to Nomura, the group has accumulated a war chest for M&A but has yet to find targets that are sufficiently attractive on a risk/reward basis.

The group requires a 15% IRR for acquisitions in familiar core businesses and a higher hurdle rate for investments in new businesses and emerging markets (eg, 18-20% for China).

Here's more from Nomura:

The group has consciously grown beyond Singapore and its heritage as a defense contractor. Over the past decade, it has grown its US-based revenue by ~15% (from 11% to 26%), via acquisitions and investments in the US.

Over the next 10 years, management expects China to form a larger share of revenues. In expanding overseas, the group believes in creating local teams with ‘local content’ to run operations, with Singaporeans making up only 10-20% of the team.

Similarly, over the course of the past 10 years, STE has grown its nondefense revenue by 20% (from 43% to 63%). It now generate about a third its revenues each from defense, government agencies and commercial work.

Historically, group revenues have been driven by projects, which tend to be lumpy. Again, the group has consciously grown its recurring income stream over time. Eg, 30% of its electronics revenues are now from recurring-type revenue such as maintenance support and spare sales.

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